September 19, 2019 / 1:59 PM / 2 months ago

TREASURIES-Yields fall on Fed division over future rate cuts, lower funding costs

    * Fed cut rates, divided on further decreases
    * Funding markets stabalize, helping demand for U.S. debt

    By Karen Brettell
    NEW YORK, Sept 19 (Reuters) - U.S. Treasury yields fell on
Thursday after the Federal Reserve on Wednesday showed division
among policymakers on whether further rate cuts are likely, and
as pressures in the short-term funding markets eased.
    The U.S. central bank cut the benchmark overnight lending
rate to a range of 1.75% to 2.00% on a 7-3 vote and nodded to
ongoing global risks and "weakened" business investment and
exports.
    New projections showed policymakers at the median expected
rates to stay within the new range through 2020. However, in a
sign of ongoing divisions within the Fed, seven of 17
policymakers projected one more quarter-point rate cut in 2019.
            
    “They basically kept the door open to further cuts, but
didn’t really walk through it or commit to walking through it in
any way, shape, or form,” said Gennadiy Goldberg, an interest
rate strategist at TD Securities in New York.
    A flattening yield curve also reflected concerns that the
Fed may not be aggressive as needed in cutting rates to stem
economic weakness.
    Benchmark 10-year notes             were last up 6/32 in
price to yield 1.765%, down from 1.784% on Wednesday. 
    The yield curve between two-year and 10-year notes
               has flattened to 3 basis points, from 7 basis
points before the Fed statement.
    The yield curve inverted in August for the first time in
more than a decade, a signal that a recession is likely to
follow in one-to-two years, though it has held in positive
territory since Sept. 4.
    The New York Federal Reserve on Thursday conducted a
repurchase agreement (repo) operation for the third consecutive
day in a bid to ease funding pressures that on Tuesday sent the
cost of overnight loans soaring to 10%.             
    Falling funding costs helped support demand for Treasuries
on Thursday as it made the cost of financing fixed income
positions cheaper.
    “You’re seeing a little bit better performance in Treasuries
partly because repo has actually declined,” Goldberg said.
    Concerns about rising tensions between the United States and
Iran have also added a safety bid for U.S. debt this week.
    Iran warned U.S. President Donald Trump on Thursday against
being dragged into all-out war in the Middle East following an
attack on Saudi Arabian oil facilities which Washington and
Riyadh blame on Tehran.             
    Investors are also focused on trade negotiations between the
United States and China, with negotiators set to resume
face-to-face talks on Thursday for the first time in nearly two
months.             

 (Editing by Bernadette Baum)
  
 
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