August 5, 2019 / 3:02 PM / 4 months ago

TREASURIES-U.S. yields tumble as trade fears spur bond rally

    * U.S. services sector growth slowest in three years -ISM
    * Futures imply traders fully expect Fed rate cut in Sept.
    * U.S. to sell $84 bln in coupon-bearing debt this week

 (Updates market action, adds quote, graphics)
    By Richard Leong
    NEW YORK, Aug 5 (Reuters) - U.S. Treasury yields tumbled on
Monday, with 10-year yields hitting their lowest level since
November 2016, as fears over escalation of U.S.-Chinese trade
tensions renewed concerns about an economic downturn, spurring
safe-haven demand for bonds.
    China allowed the yuan to breach the key seven-per-dollar
level for the first time in more than a decade, in a sign
Beijing might be willing to tolerate more currency weakness that
could further inflame the trade conflict with the United States.
    The decision followed U.S. President Donald Trump's threat 
last week to impose 10% tariffs on $300 billion of Chinese
imports starting Sept. 1.
    "There's a lot of fears out there," said Larry Milstein,
head of government and agency trading at R.W. Pressprich & Co.
in New York. "What is the path that could end this? It doesn't
seem we are going to get there anytime soon."
    The growing trade friction between the world's two biggest
economies appeared to begin hurting the U.S. services sector on
top of the squeeze on domestic manufacturers. 
    The Institute for Supply Management's index on U.S. services
activity showed the vast economic sector's growth slowed to its
weakest level in three years in July.
    Anxious investors have been bailing from stocks and other
risky assets with Wall Street's main stock indexes falling 2%.

    They have favored U.S. government debt, the yen, gold and
other perceived low-risk assets to park their money.
    At 10:45 a.m. (1445 GMT), the yields on benchmark 10-year
Treasury notes were down 8.8 basis points at
1.7667%. They hit 1.743% earlier on Monday, which was their
lowest since Nov. 9 2016, the day after Trump was elected
    The two-year yield, which is sensitive to
traders' view on Fed policy, touched 1.587%, its lowest since
November 2017. It was last 11.9 basis points lower at 1.6033%.
    Interest rates futures implied traders fully expect the U.S.
central bank would lower rates again at its Sept. 17-18 policy
meeting after it cut them for the first time since 2008 last
week, CME Group's FedWatch program showed.
    The difference between the three-month Treasury bill rate
 and 10-year yields grew to nearly 27
basis points, the widest since April 2007. 
    This curve "inversion" between the two maturities has
preceded every U.S. recession in the past 50 years.
    Meanwhile, the blistering demand for Treasuries is expected
to stoke bidding for this week's quarterly refunding where the
government will sell $38 billion in three-year debt, $27 billion
in 10-year notes and $19 billion in 30-year bonds.
August 5 Monday 10:46AM New York / 1446 GMT
 US T BONDS SEP9               160-13/32    58/32     
 10YR TNotes SEP9              129-188/256  28/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.975        2.0174    -0.047
 Six-month bills               1.9025       1.9471    -0.068
 Two-year note                 100-79/256   1.5913    -0.131
 Three-year note               100-148/256  1.548     -0.131
 Five-year note                100-248/256  1.5472    -0.123
 Seven-year note               101-142/256  1.6385    -0.113
 10-year note                  105-144/256  1.7531    -0.102
 30-year bond                  112-48/256   2.3068    -0.085
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       15.90        2.85      
 30-year vs 5-year yield       75.60        3.50      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        -0.25        -2.75    
 U.S. 3-year dollar swap        -4.25        -3.00    
 U.S. 5-year dollar swap        -6.00        -2.25    
 U.S. 10-year dollar swap      -10.75        -2.25    
 U.S. 30-year dollar swap      -41.50        -3.00    

 (Reporting by Richard Leong
Editing by Steve Orlofsky and Paul Simao)
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