TREASURIES – U.S. Yields Fall as New Virus Continues to Torment Markets

U.S. Treasury prices advanced on Friday, pushing yields lower for a fourth straight session, as the uncertainty surrounding the latest coronavirus from China continued to undermine risk appetite and spur demand for safe-haven assets. U.S. 30-years declined to fresh seven-week lows, while those on benchmark 10-year notes dropped to new two-week troughs. U.S. 10-year yields have lost nearly 13 basis points this week, on track for its largest weekly drop in about 3-1/2 months. Thirty-year yields, on the other hand, have fallen roughly 14 basis points this week, its biggest weekly decline in four months. As rates fell, the yield curve flattened again on Friday as market sentiment continued to take a hit amid a host of unknowns about the Chinese coronavirus. The spread between the two-year and 10-year note yields contracted to as low as 19.91 basis points, the narrowest gap since mid-December. “The virus clearly in the short term has spooked the market,” said Gregory Faranello, head of U.S. rates at Amerivet Securities in New York. “As a result, we have seen the grind lower in the 10-year space to 1.70% and the flattening of the yield curve.” On Friday, China shut part of the Great Wall and suspended public transport in 10 cities, stranding millions of people at the start of the Lunar New Year holiday as authorities rush to contain a virus that has killed 26 people and infected more than 800 already. That said, BMO Capital Markets believe that the Chinese virus was far from being a pandemic health crisis. “The chance of a sharp drop in economic activity due to the illness remains a low-odds tail risk, but one with an admittedly non-zero probability,” BMO Capital wrote in a research note. This, it added, could open the door for a “quick retracement back to the center of the range if the angst appears unfounded.” In morning trading, U.S. 10-year yields fell to 1.701%, from 1.739% late on Thursday. Earlier in the session, 10-year yields fell to two-week lows of 1.699%. BMO said 1.70% and 1.90% in 10-year yields represent “identifiable parameters” ahead of next week’s Federal Reserve policy meeting, which many consider to be a non-event given that the Fed is expected to be on hold for some time. Yields on U.S. 30-year bonds were at 2.147%, down from 2.182% on Thursday. Thirty-year yields earlier fell to seven-week troughs of 2.146%. On the short end of the curve, U.S. two-year yields fell to 1.498% from Wednesday’s 1.518%. January 24 Friday 10:24 AM New York/1524 GMT Price Current Net Yield % Change (bps) Three-month bills 1.5225 1.5536 -0.002 Six-month bills 1.5225 1.5596 -0.002 Two-year note 100-61/256 1.4988 -0.019 Three-year note 100-10/256 1.4864 -0.027 Five-year note 101-24/256 1.5186 -0.036 Seven-year note 100-216/256 1.6206 -0.038 10-year note 100-112/256 1.7012 -0.038 30-year bond 105 2.1469 -0.035 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 5.50 -0.75 spread U.S. 3-year dollar swap 2.75 -0.75 spread U.S. 5-year dollar swap 0.00 -0.50 spread U.S. 10-year dollar swap -5.75 -0.50 spread U.S. 30-year dollar swap -32.25 -0.75 spread

(Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis)