November 5, 2018 / 8:19 PM / 8 days ago

TREASURIES-U.S. bond yields fall before elections, 3-year sale soft

    * Traders wary ahead of U.S. congressional elections
    * Direct bidders buy smallest share of 3-year issue in nine
years
    * U.S. to sell record $27 bln 10-year notes on Tuesday

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Nov 5 (Reuters) - U.S. Treasury yields fell on
Monday as traders stepped back into the bond market following
last week's sell-off to reduce their bearish positions and hedge
against any surprises in the U.S. congressional elections on
Tuesday.
    "The general feeling is not to go with very extreme
positions before the elections," said Tom Simons, senior money
market economist at Jefferies LLC in New York. "The view is that
the outcome could result in a shift in the direction of
government policies."
    Tuesday's elections will determine whether Democrats wrest
one or both of the two chambers of Congress from Republicans.
    If Democrats win control of the House of Representatives, as
many polls are indicating, analysts anticipate further gridlock
that will not yield any fiscal legislation, such as the massive
tax cuts enacted last December.
    The latest polls showed Republicans will likely retain their
majority in the Senate. 
    Investors also await clues about the Federal Reserve's view
on future interest rate increases when policymakers meet on
Wednesday and Thursday.
    On moderate trading volume, the yield on benchmark 10-year
Treasury notes was more than 1 basis point lower at
3.201 percent.
    The 30-year bond yield fell 2 basis points to
3.434 percent after on Friday touching 3.464 percent, which was
the highest since July 2014. 
    The two-year yield was little changed at 2.912
percent, within striking distance of 2.920 percent on Friday, a
level not seen June 2008. 
    The Treasury sold $37 billion of three-year notes, the first
leg of the government's quarterly refunding that is expected to
raise $28.7 billion in new cash to fund the federal deficit.

    Overall demand was soft with direct bidders, which include
bond dealers and select institutional investors, buying 3
percent of the latest three-year supply, which was their
smallest share in nearly nine years.
    The ominous start to the refunding raised caution about
bidding for the record amounts of 10-year and 30-year offerings
for sale this week.
    Declining purchases from overseas central banks, together
with rising hedging costs, are risks for the longer-dated
auctions.
    On the other hand, data suggested speculators pared their
bearish bets on 10-year Treasuries last week, while asset
managers built record bullish positions in 10-year T-note
futures, Commodity Futures Trading Commission data released late
on Friday showed.
    "My feeling is that direct bidders will evaporate," Simons
said of possible results at the longer-dated auctions.    
November 5 Monday 3:10PM New York / 2010 GMT
                               Price                  
 US T BONDS DEC8               137-18/32    13/32     
 10YR TNotes DEC8              118-36/256   3/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.2775       2.3218    -0.005
 Six-month bills               2.435        2.4987    0.000
 Two-year note                 99-238/256   2.9116    0.000
 Three-year note               99-182/256   2.978     0.000
 Five-year note                99-78/256    3.0263    -0.012
 Seven-year note               99-68/256    3.1178    -0.015
 10-year note                  97-72/256    3.2008    -0.013
 30-year bond                  91-244/256   3.4335    -0.020
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       28.70        -1.75     
 30-year vs 5-year yield       40.70        -1.35     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        19.25        -1.00    
 spread                                               
 U.S. 3-year dollar swap        17.00        -1.50    
 spread                                               
 U.S. 5-year dollar swap        14.25         0.00    
 spread                                               
 U.S. 10-year dollar swap        6.00         0.00    
 spread                                               
 U.S. 30-year dollar swap      -11.50         0.50    
 spread                                               
 

    
 (Reporting by Richard Leong; Editing by Jeffrey Benkoe and Dan
Grebler)
  
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