February 28, 2020 / 6:27 PM / a month ago

TREASURIES-Virus concerns stoke buying; 2-year yield below 1% for first time since 2016

 (Recasts and updates with market activity, analyst comment)
    By Ross Kerber and Dhara Ranasinghe
    BOSTON / LONDON, Feb 28 (Reuters) - Money continued to pour
into U.S. Treasuries on Friday on coronavirus concerns,
pressuring central bankers to cut rates by sending the yield on
the two-year note below 1% for the first time since 2016.     
    Yields on longer-term Treasuries were also down sharply,
with the yield on the benchmark 10-year note down
12.6 basis points in afternoon trading to 1.1732%. Late on
Friday morning the note's yield was 1.1453%, marking a record
low for the fourth consecutive day.
    Six countries reported their first cases of the coronavirus
as the world prepared for a pandemic and investors fearing a
global recession dumped equities.
    With world stock markets set for their biggest weekly
decline since the 2008 global financial crisis, investors
flocked to safe-haven U.S. government bonds.
    The trading also reflected expectations central banks would
cut rates to offset economic shocks.   
    A sharp two-day spike in April federal funds futures
left the implied fed funds rate at 1.34% early Friday. Traders
now see a 100% chance of at least a 25-basis-point cut to the
current 1.50%-1.75% fed funds target rate at the Federal
Reserve's March meeting, according to the CME FedWatch tool,
    There were calls for the Fed to coordinate cuts with other
central banks.
    "Given the bloodbath we've seen in the equity markets, the
psychological impact of a rate cut will likely be seen
positively," said Mary Ann Hurley, vice president for fixed
income trading at D.A. Davidson. 
    The two-year U.S. Treasury yield was down 15.8
basis points to 0.9447%, and at one point was at 0.8913%, its
lowest level since late 2016.
    The two-year yield is seen as a market proxy for fed funds,
and the drop widened the differential with the target rate to
more than 50 basis points, which could add pressure on the Fed
to cut to keep the costs of short-term money aligned.
    The movement also steepened the portion of the U.S. Treasury
yield curve measuring the difference between yields on two- and
10-year Treasury notes. It was at 22.6 basis points, up 8.6
basis points from Thursday's close, after reaching as high as 27
basis points.
    However, even though the market is expecting rate cuts, it
is not clear that they would address the root public-health
concerns driving trading, said Subadra Rajappa, head of U.S.
rates strategy for Societe Generale.
    The situation facing Fed policymakers now, she said, is
"more a supply shock than any meaningful slowdown in the
economic data. It puts them in a tough spot. It's not clear that
 rate cuts would have a meaningful impact on stabilizing what is
ultimately a fear factor in the market," she said.
    D.A. Davidson's Hurley said Fed policymakers also may be
reluctant to lower rates after easing three times last year.
"They're running out of bullets," she said. 
    St. Louis Federal Reserve Bank President James Bullard said
on Friday that the Fed does not need to cut U.S. interest rates
just because markets have priced in aggressive central bank
action, but policymakers will be monitoring events closely
before the upcoming March 17-18 meeting.
    
      February 28 Friday 1:07PM New York / 1807 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.29         1.3156    -0.138
 Six-month bills               1.1475       1.1733    -0.142
 Two-year note                 100-91/256   0.9447    -0.158
 Three-year note               101-70/256   0.9372    -0.156
 Five-year note                100-192/256  0.9708    -0.136
 Seven-year note               100-68/256   1.0855    -0.133
 10-year note                  103-16/256   1.1732    -0.126
 30-year bond                  107-140/256  1.6784    -0.105
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         5.50         2.00    
 spread                                               
 U.S. 3-year dollar swap         3.25         2.25    
 spread                                               
 U.S. 5-year dollar swap         2.75         1.50    
 spread                                               
 U.S. 10-year dollar swap       -5.00         0.50    
 spread                                               
 U.S. 30-year dollar swap      -38.50        -1.25    
 spread                                               
 
    

 (Reporting by Ross Kerber and Dhara Ranasinghe; Editing by
Giles Elgood, David Gregorio, Jonathan Oatis and Dan Grebler)
  
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