US yields fall as traders cool on more Fed rate hikes

NEW YORK: US Treasury yields tumbled on Thursday, with 10-year yields hitting three-month lows, as traders scaled back expectations on the number of rate hikes the Federal Reserve would implement amid weakening economic data and market volatility.

Uncertainties over negotiations for Britain to exit the European Union and worries over escalating trade tensions between China and United States following the arrest of a top executive of Chinese technology giant Huawei Technologies Co. also stoked safe-haven demand for US government debt, analysts and traders said.

The backtracking in the rate-hike outlook kindled appetite for short-dated Treasuries, tilting the yield curve slightly away from its flattest levels in over a decade.

Earlier this week, shorter-dated yields rose above medium yields for the first time since early 2008, stoking speculation about a US recession in the coming months.

"The yield curve is pricing out rate hikes. There are just worries about the global economy," said Karl Haeling, vice president at Landesbank Baden-Wurttemberg in New York.

Interest rate futures implied traders now see no more than one rate increase from the Fed in 2019, compared with expectations for possibly two rate hikes a month earlier, according to CME Group's FedWatch program.

Fed policymakers are still expected to increase key short-term lending rates by a quarter point to a target range of 2.25-2.50 percent at their Dec. 18-19 meeting.

Atlanta Fed President Raphael Bostic said the Fed is within "shouting distance" of a neutral rate where borrowing costs are supportive of growth without stoking inflation.

At 2:28 p.m. (1928 GMT), the yield on two-year Treasury notes fell 6 basis points to 2.763 percent after touching 2.693 percent, its lowest level since Sept. 10.

The benchmark 10-year yield hit a three-month trough of 2.826 percent. It was last down over 5 basis points at 2.867 percent.

The spread between two-year and 10-year yields had widened as much as 2 basis points before reversing little changed at 11.90 basis points. On Tuesday, it contracted to 9 basis points, its tightest in over a decade.

Treasury yields bounced from session lows as Wall Street pared earlier losses with the Dow coming back from a 785 point-drop.

US financial markets were closed on Wednesday for a national day of mourning for former US President George H.W. Bush who died last Friday.

Thursday's domestic economic data did not bolster traders' confidence about the economy.

The US trade deficit surged to a 10-year high in October as soybean exports fell further and imports of consumer goods rose to a record high.

Payroll processor ADP said domestic private payrolls grew by 179,000 last month, fewer than the 195,000 forecast of analysts polled by Reuters.