CORRECTED-TREASURIES-Two-year yields hit record lows, fed fund futures imply negative rates

 (Shortens quote in paragraph 10 to make clearer)
    By Karen Brettell
    NEW YORK, May 8 (Reuters) - Two-year Treasury yields hit
record lows on Friday and fed fund futures implied the Federal
Reserve could cut rates into negative territory, though analysts
said the move was likely technical as investors betting on
higher rates were squeezed out of their positions.
    The move came after data on Friday showed the U.S. economy
lost a staggering 20.5 million jobs in April, the steepest
plunge in payrolls since the Great Depression and the starkest
sign yet of how the novel coronavirus pandemic is battering the
world's biggest economy.
    The rally faded in afternoon trading as investors
repositioned ahead of the weekend.
    Investors are evaluating how long it will take for the
economy to recover, and how much more fiscal and monetary
stimulus will be needed to spur growth.
    The Fed in March cut rates to zero and has launched numerous
lending programs meant to blunt the economic impact of business
shutdowns.
    But U.S. central bank officials including Chairman Jerome
Powell have talked down the likelihood of adopting a negative
rate policy.
    “The Fed has consistently said they’re not interested in
negative rates,” said Robert Tipp, chief investment strategist
at PGIM Fixed Income.
    Optimism that the economy is closer to reopening has boosted
risk assets this week and led some investors to bet that yields
could rise from historic lows.
    The sharp price rally in short-dated debt, however, is
likely due to these investors having to cover their positions as
the market moved against them.
    “What can happen is when rates get lower and lower, and the
Fed is flooding the markets with liquidity, is you can get
people that are forced to take those trades off," Tipp said.
    Two-year yields dropped to as low as 0.105%,
before rising back to 0.1508%. 
    The yields hit their lows after White House economic adviser
Larry Kudlow said the White House will not consider any further
stimulus legislation this month as it watches the economic
impact from reopening U.S. states.
    Fed fund futures earlier on Friday showed that the
U.S. central bank could be forced to cut rates into negative
territory by December, but the probability moved back to April
2021 in afternoon trading.
    The Fed is reluctant to adopt negative rates due to concerns
such a move may not be effective in stimulating growth, and
because it may disrupt the banking system and U.S. money
markets.
    “We have a money market fund industry whose business model
would come under severe strain if rates were negative,” UBS
strategists led by Michael Cloherty said in a report.
    The Fed could face pressure to either adopt negative rates
or guide the market away from the possibility, however, if
markets continue to price for the scenario.
    "The risk from the Fed’s perspective is that this price
action starts to become cemented, and so it becomes a bit of a
self-fulfilling loop. Or they’re going to effectively have to
implement a hawkish forward guidance,” said Jon Hill, an
interest rate strategist at BMO Capital Markets in New York.
    Benchmark 10-year note yields were last 0.680%,
after falling to 0.607% earlier on Friday. The yields have held
in a tight band between 0.543% and 0.785% since the beginning of
April.
    

      May 8 Friday 3:02PM New York / 1902 GMT
                               Price                  
 US T BONDS JUN0               179-23/32    -1-13/32  
 10YR TNotes JUN0              138-244/256  -0-88/25  
                                            6         
                               Price        Current   Net Change
                                            Yield %   (bps)
 Three-month bills             0.115        0.117     0.011
 Six-month bills               0.145        0.1475    0.007
 Two-year note                 99-243/256   0.1508    0.022
 Three-year note               100-34/256   0.2045    0.022
 Five-year note                100-64/256   0.3243    0.030
 Seven-year note               99-212/256   0.5251    0.039
 10-year note                  107-188/256  0.6799    0.049
 30-year bond                  114-252/256  1.384     0.063
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         9.75        -1.25    
 spread                                               
 U.S. 3-year dollar swap         4.50        -1.00    
 spread                                               
 U.S. 5-year dollar swap         1.75        -1.00    
 spread                                               
 U.S. 10-year dollar swap       -4.50        -0.50    
 spread                                               
 U.S. 30-year dollar swap      -50.25        -0.25    
 spread                                               
 

 



    
 (Additional reporting by Kate Duguid; Editing by Chris Reese
and Sonya Hepinstall)
  

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