May 13, 2019 / 7:04 PM / 4 months ago

TREASURIES-U.S. bond yields fall as China plans tariff retaliation

    * Beijing to slap higher duties on $60 bln of U.S. goods
    * U.S. 3-month, 10-year part of yield curve inverts 
    * Speculation about China dumping U.S. bonds heats up again 
    * Futures imply traders raise bets on a year-end U.S. rate
cut

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, May 13 (Reuters) - U.S. Treasury yields fell to
six-week lows on Monday as investors piled into low-risk assets
after China announced plans to impose additional tariffs on
U.S.-made goods in retaliation for a U.S. increase in duties on
Chinese imports on Friday. 
    China's finance ministry said early on Monday it plans to
set import tariffs ranging from 5% to 25% on 5,140 U.S. products
on a target list worth about $60 billion. It said the tariffs
will take effect on June 1.
    Beijing's response rattled already jittery investors, who
were caught off guard by last week's breakdown of efforts to
reach a trade deal between the world's biggest economic powers.
    Investors and analysts are assessing the impact from this
round of tariffs on global business activities.
    "With rising protectionist measures, the damage to economic
growth is increasing," said Stephen Gallagher, U.S. chief
economist at Societe Generale in New York.
    He estimated the latest round of U.S. and Chinese tariffs
may reduce global economic growth by 0.15%.
    The futures market implied traders now see a 70% chance the
Federal Reserve would reduce interest rates by year-end,
according to CME Group's FedWatch program.
    At 2:52 p.m. (1852 GMT), the yield on the benchmark 10-year
Treasury was 5.2 basis points lower at 2.4033% after
touching 2.389%, the lowest since March 28. 
    Ten-year yields fell below those on three-month Treasury
bills. A sustained inversion of this part of the
yield curve has preceded every U.S. recession in the past 50
years. 
    Buying of longer-dated Treasuries likely stemmed from hedge
funds covering short positions in the wake of renewed U.S.-China
trade tension, according to data from Commodity Futures Trading
Commission released late Friday.
    As investors shifted money into Treasuries, yen, gold and
other safe-haven assets, they pulled money out of stocks and
other risky investments. Wall Street's main indexes fell sharply
in early trading with the S&P 500 losing 2.19%.
    In addition to more tariffs, traders are concerned China,
the largest foreign U.S. creditor, may dump Treasuries to
counter the Trump administration's hardening trade stance.
    Most analysts downplayed such a move, which would send U.S.
borrowing costs soaring, strengthen the yuan and hurt Chinese
exporters. It would also hammer the value of China's massive
Treasury holdings, which totaled $1.131 trillion in February.

    "It may end up hurting the Chinese economy more than the
U.S. economy," said Mike Lorizio, head of Treasuries trading at
Manulife Asset Management in Boston. "But it shows the overall
deterioration in negotiations," he said about the renewed market
chatter about China selling Treasuries as a trade weapon.
May 13 Monday 2:53PM New York / 1853 GMT
                               Price                  
 US T BONDS JUN9               149-15/32    26/32     
 10YR TNotes JUN9              124-108/256  14/32     
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.36         2.4063    -0.023
 Six-month bills               2.3575       2.4183    -0.025
 Two-year note                 100-28/256   2.1925    -0.059
 Three-year note               99-236/256   2.152     -0.062
 Five-year note                100-74/256   2.1881    -0.062
 Seven-year note               100-142/256  2.2883    -0.058
 10-year note                  99-188/256   2.405     -0.050
 30-year bond                  100-188/256  2.8385    -0.034
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       21.00        1.25      
 30-year vs 5-year yield       65.00        2.70      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         8.25        -1.50    
 spread                                               
 U.S. 3-year dollar swap         5.75        -1.50    
 spread                                               
 U.S. 5-year dollar swap         2.75        -1.00    
 spread                                               
 U.S. 10-year dollar swap       -3.25        -1.25    
 spread                                               
 U.S. 30-year dollar swap      -27.75        -2.00    
 spread                                               
 

    
 (Reporting by Richard Leong; Editing by Dan Grebler and Nick
Zieminski)
  
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