January 31, 2020 / 7:51 PM / in 23 days

TREASURIES-Yields drop to three-month lows as virus fears grow

 (Adds data, updates prices)
    * Chinese coronavirus fears hurt risk appetite
    * Treasury to give quarterly refunding plans next Wednesday
    * Heavy data scheduled next week, including monthly jobs

    By Karen Brettell
    NEW YORK, Jan 31 (Reuters) - Benchmark 10-year Treasury
yields dropped to more than three-month lows on Friday and
two-year note yields fell to their lowest levels since 2017 as
concerns about the spreading coronavirus boosted demand for
safe-haven assets.
    The virus has spread to more than 20 countries and regions.
As of Friday China had reported 213 deaths and 9,800 cases.

    “We may have this underlying bid (for Treasuries) for some
time, just until more is known about the coronavirus; how much
it’s spread, the timeline, vaccines, etc.,” said Justin Lederer,
an interest rate strategist at Cantor Fitzgerald in New York.
    Benchmark 10-year note yields dropped as low as
1.519%, the lowest since Oct. 8.
    Thirty-year bond yields briefly fell below 2%
for the first time since September.
    “The real interesting thing has been the move in the long
end," said Lou Brien, market strategist at DRW TRading in
Chicago. "That’s the combination of not only the 'risk off'...
but some of the data has been bad.”
    Data on Friday showed that a gauge of U.S. Midwest
manufacturing activity slid to a four-year low in January, with
new orders and production tumbling and producers forecasting
tepid activity in 2020.
    U.S. consumer spending, meanwhile, rose steadily in
December, but tepid income gains pointed to moderate consumption
growth this year.
    Traders are betting that economic concerns could lead the
Federal Reserve to cut rates this year. 
    Interest rate futures traders are pricing in a 79%
likelihood of at least one rate cut by September, according to
the CME Group’s FedWatch Tool.
    Two-year note yields, which are the most
sensitive to interest rate policy, fell to 1.337%, the lowest
since September, 2017.
    The closely watched yield curve between three-month bills
and 10-year notes moved in and out of inversion on Friday, a
bearish signal for the U.S. economy.
    That part of the yield curve inverted last March for the
first time since the financial crisis, signaling the potential
for a recession in a year or two.
    Portfolio rebalancing for month-end likely helped boost
demand for Treasuries on Friday. 
    The Treasury Department will give its refunding plan for the
coming quarter on Wednesday, which is of extra interest to
market participants since the government said earlier this month
that it plans to relaunch the 20-year bond.
    Next week will also feature a heavy schedule of data,
including Friday’s jobs report for January.
      January 31 Friday 2:38PM New York / 1938 GMT
                               Price        Current   Net Change
                                            Yield %   (bps)
 Three-month bills             1.5225       1.5536    -0.015
 Six-month bills               1.505        1.5416    -0.018
 Two-year note                 100-17/256   1.3411    -0.050
 Three-year note               100-132/256  1.321     -0.041
 Five-year note                100-44/256   1.3393    -0.038
 Seven-year note               100-92/256   1.4458    -0.026
 10-year note                  101-252/256  1.5307    -0.024
 30-year bond                  108-28/256   2.0116    -0.014
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         6.00         0.75    
 U.S. 3-year dollar swap         2.50         0.25    
 U.S. 5-year dollar swap         0.25         0.25    
 U.S. 10-year dollar swap       -5.50         0.25    
 U.S. 30-year dollar swap      -33.25        -0.50    


 (Editing by David Gregorio, Nick Zieminski and Dan Grebler)
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