February 27, 2020 / 5:35 PM / a month ago

TREASURIES-Yields pare declines after coronavirus worry sends 10-year below 1.25%

 (Updates with market activity, analyst comment, government
response)
    By Ross Kerber
    BOSTON, Feb 27 (Reuters) - U.S. Treasury yields steadied
following sharp declines on Thursday as coronavirus concerns led
investors to pile into safe-haven assets, with the yield on the
benchmark 10-year note reaching an all-time low for the third
consecutive day.
    The yield on the 10-year note was down less than
a basis point in midday trading at 1.3054% after reaching as low
as 1.2408%, a record low.    
    Yields on other Treasuries also fell, including on the
30-year bond, which also hit a new low. 
    Analysts said the rush to safety came as more coronavirus
cases were reported worldwide, drawing buyers for U.S.
government debt from among investors dumping equities and other
assets, as well as regular fixed-income customers.
    "The Treasury market is truly the risk-free asset for
everybody," said Michael Kushma, chief investment officer of
global fixed income at Morgan Stanley Investment Management. 
    How long the dynamic lasts depends on whether U.S. companies
start to lay off workers, which could lead to declines in
consumer spending, he said, adding the U.S. Federal Reserve is
likely tracking the same issue.
    "The key factor of how this will play out for the Fed is if
the labor market stays okay," Kushma said.
    Yields recovered somewhat in midday trading as investors
tried to predict how corporations and central bankers might
respond to disruptions.
    European Central Bank President Christine Lagarde played
down the economic impact of the coronavirus epidemic in an
interview published on Thursday, saying it was not yet causing
lasting economic damage.
    The U.S. yield curve, measured as the difference between
yields on two- and 10-year Treasury notes, was at 20 basis
points, up 5.82 basis points from Wednesday.
    The steepening reflected how yields on the two-year note,
which typically move in step with interest rate expectations,
fell more than the 10-year. The two-year was 4 basis points
lower in midday trading at 1.1051%, close to its lowest since
late 2016.
    Wall Street's main indexes fell for the sixth straight
session and confirmed they entered a correction after setting
record highs this month.
    The outbreak has reached a "decisive point," the head of the
World Health Organisation (WHO) said on Thursday, urging
countries to redouble efforts to contain it. 
    Goldman Sachs said U.S. companies will generate no earnings
growth in 2020 as the coronavirus spreads, deepening risks to
global growth.
    Growing uncertainty about the virus has driven bond yields
steadily lower since January. 
    While yields tended to trade within set ranges in 2019,
largely determined by developments in the U.S.-China trade
negotiations, this year's trading has been tied to more
unpredictable news about the coronavirus outbreak, said Jonathan
Cohn, Credit Suisse interest rate strategist.
    "In the trade war the administration (of U.S. President
Donald Trump) had a lot more control over the ebb and flow of
headlines, compared to an epidemic where governments globally
are trying to contain it," Cohn said. 
    Analysts will be focused on the results of an auction of
7-year notes by the U.S. Treasury later on Thursday.
    
  February 27 Thursday 12:08PM New York / 1708 GMT
                                                      
                                                      
                                                      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.425        1.4539    -0.064
 Six-month bills               1.2925       1.3226    -0.090
 Two-year note                 100-10/256   1.1051    -0.040
 Three-year note               100-206/256  1.0983    -0.027
 Five-year note                100-16/256   1.1121    -0.015
 Seven-year note               101-216/256  1.2214    -0.008
 10-year note                  101-208/256  1.3054    -0.005
 30-year bond                  104-168/256  1.7983    0.000
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         4.25         0.50    
 spread                                               
 U.S. 3-year dollar swap         1.25         0.00    
 spread                                               
 U.S. 5-year dollar swap         1.50         1.25    
 spread                                               
 U.S. 10-year dollar swap       -5.50         0.25    
 spread                                               
 U.S. 30-year dollar swap      -37.25         0.50    
 spread                                               
 
 (Reporting by Ross Kerber; Editing by David Gregorio and Chris
Reese)
  
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