December 27, 2019 / 2:05 PM / a month ago

TREASURIES-Yields fall as year-end approaches

    By Karen Brettell
    NEW YORK, Dec 27 (Reuters) - U.S. Treasury yields fell on
Friday as the debt found support following a selloff that sent
yields to one-month highs, with year-end portfolio rebalancing
likely helping demand for the bonds.
    Yields have risen this month as optimism about a trade
agreement between the United States and China increased risk
appetite.
    U.S. President Donald Trump said on Tuesday he and Chinese
President Xi Jinping will have a ceremony to sign the first
phase of the U.S.-China trade deal agreed to this month.

    Benchmark 10-year yields have backed up from
1.69% at the beginning of December and are up from a three-year
low of 1.43% reached on Sept. 3.
    But the notes found support at around the 1.95% area and
fell to 1.88% on Friday.
    “The December selloff in general has taken many momentum
indicators to oversold,” analysts at NatWest Markets said in a
report on Friday. “Now, across (Treasury) benchmarks, those have
turned bullishly, after several tests of support the last
several weeks.”
    The yield curve between 2-year and 10-year notes
 also flattened to 26 basis points, after reaching
31 basis points on Dec. 19., which was the steepest since Oct.
2018.
    Year-end demand for Treasuries to rebalance portfolios
likely helped support the bonds on Friday. 
    Trading volumes were thin, however, as many investors and
traders were away after Wednesday's Christmas Day holiday. 
    Investors are also focused on whether there will be strains
in the overnight funding markets, with banks expected to pare
risk taking for year-end.
    The New York Federal Reserve has been injecting liquidity
into the repurchase agreement (repo) market in order to reduce
the chance of funding stress, after a flareup in September sent
the cost of overnight loans as high as 10%, more than four times
the Fed’s rate at the time.
    The Fed's repo operations, however, are made only with major
dealers, with the banks in turn passing liquidity on to their
clients.
    This could lead some clients struggling to raise funds over
the year-end period if banks cut back lending.
      December 27 Friday 8:54AM New York / 1354 GMT
    
                               Price        Current   Net Change (bps)
                                            Yield %   
 Three-month bills             1.5425       1.5741    -0.003
 Six-month bills               1.555        1.5932    -0.013
 Two-year note                 100-5/256    1.6151    -0.022
 Three-year note               100-2/256    1.6222    -0.025
 Five-year note                100-66/256   1.696     -0.029
 Seven-year note               99-164/256   1.8049    -0.031
 10-year note                  98-220/256   1.877     -0.028
 30-year bond                  101-112/256  2.3081    -0.029
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         8.50         0.50    
 spread                                               
 U.S. 3-year dollar swap         5.50         0.75    
 spread                                               
 U.S. 5-year dollar swap         0.50         0.75    
 spread                                               
 U.S. 10-year dollar swap       -4.25         0.25    
 spread                                               
 U.S. 30-year dollar swap      -29.50         0.50    
 spread                                               
 

 (Editing by Steve Orlofsky)
  
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