July 10, 2019 / 2:32 PM / 3 months ago

TREASURIES-Yield curve steepens; Fed chief remarks boost rate cut bets

 (New throughout, updates market activity, adds Fed details and
analyst comments)
    By Kate Duguid
    NEW YORK, July 10 (Reuters) - The U.S. Treasury yield curve
steepened on Wednesday after Federal Reserve Chair Jerome Powell
increased expectations that the U.S. central bank may cut rates
more sharply than expected in July.
    Powell's prepared remarks to a congressional committee were
published Wednesday morning. The chance of a 50 basis point cut
rose to 21.4 percent from 3.3 percent on Tuesday, according to
CME Group's FedWatch tool, while the chance of a 25-point cut in
July was 78.6%, down from Tuesday.
    The two-year Treasury yield, a proxy for market sentiment
about interest rate policy, was last 5.5 basis points lower at
1.852%. Yields on short-dated notes fell, while
yields on longer maturities rose, steepening the yield curve and
ending a multi-day flattening trend. 
   Powell's remarks said the Fed stands ready to "act as
appropriate" to sustain a decade-long economic expansion. He
contrasted the "baseline outlook" of continued U.S. growth
against a considerable set of risks including persistently weak
inflation, slower growth in other major economies and a downturn
in business investment driven by uncertainty over the Trump
administration's trade war with China.
    At their June meeting, Fed officials signaled that those
risks could warrant a cut in rates, which has led the market to
fully price in a 25-basis-point rate cut by the end of the month
despite strong payrolls data. 
    "The market is focused on the part of Powell's testimony
where he says 'uncertainties continue.' And that led the market
to think that uncertainty alone, rather than the incoming data,
is enough to get them to move, likely 25 basis points, at the
end of this month," said Michael Pond, head of global
inflation-linked research at Barclays in New York. 
    The spread between two- and 10-year yields
was last up to 20.2 basis points, its highest in a week. It hit
a month low of 14.2 basis points on Tuesday as strong June jobs
data released July 5 tempered rate cut expectations. 
    "If the economy is deteriorating and the Fed is cutting, all
they're doing is offsetting weaker growth. But if growth is fine
and they're cutting, then that leads the market to think this is
much more of an insurance cut, which could boost risk assets and
that's in part why we’re seeing a bounce in breakeven inflation
    Later on Wednesday, minutes from the June meeting of the
Federal Open Markets Committee meeting will be released. Also on
Wednesday, the Treasury Department will auction off $24 billion
of new 10-year notes. 
     July 10 Wednesday 10:25AM New York / 1425 GMT
 US T BONDS SEP/d              154-26/32    -9/32     
 10YR TNotes SE/d              127-92/256   2/32      
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.1825       2.2251    -0.029
 Six-month bills               2.04         2.0956    -0.044
 Two-year note                 99-144/256   1.8521    -0.053
 Three-year note               99-200/256   1.8252    -0.041
 Five-year note                99-144/256   1.8425    -0.029
 Seven-year note               99-150/256   1.9388    -0.013
 10-year note                  102-212/256  2.0561    0.000
 30-year bond                  106-160/256  2.5562    0.023
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       20.20        4.80      
 30-year vs 5-year yield       71.30        5.35      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         2.25         0.25    
 U.S. 3-year dollar swap        -1.25        -1.50    
 U.S. 5-year dollar swap        -2.75         0.50    
 U.S. 10-year dollar swap       -6.25         0.25    
 U.S. 30-year dollar swap      -33.00        -0.75    
 (Reporting by Kate Duguid; Editing by David Gregorio)
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