US yields fall as nervous investors flock to bonds

NEW YORK: US Treasury yields fell on Monday with 10-year yields hovering near eight-month lows as investors who have been unsettled by dramatic stock market losses and further US interest rate increases piled more money into low-risk government debt.

Trading volume was light ahead of Tuesday's Christmas holiday. The US bond market will close at 2 p.m. EST (1900 GMT) and will stay closed on Tuesday.

A partial US government shutdown that began on Saturday heightened anxiety among traders and fund managers and likely will stoke demand for this week's $113 billion of coupon-bearing Treasuries, analysts said.

"It doesn't help things at all," Mike Lorizio, head of Treasuries and agencies trading at Manulife Asset Management in Boston said of the government shutdown. "We are seeing a classic flight-to-quality move into Treasuries."

Mick Mulvaney, the White House budget director and acting chief of staff, said on Sunday the partial federal government shutdown could continue to Jan. 3 as Democratic lawmakers and President Donald Trump hit an impasse over the latter's demand for funding for a border wall.

Analysts see the shutdown as a temporary drag on the economy if it were short-lived but they said other developments in Washington have eroded investor confidence to own stocks and other risky assets.

News that Trump has privately discussed the possibility of firing Federal Reserve Jerome Powell and the surprise resignation of Defense Secretary Jim Mattis also have roiled financial markets.

US Treasury Secretary Steven Mnuchin spoke on Sunday with the heads of the six biggest US banks to confirm they have enough cash to lend following the biggest weekly drop of the benchmark S&P 500 index since the Great Depression.

Mnuchin's call raised concerns about safety of the banking system in the wake of the stock market rout, analysts and traders said.

At 10:03 a.m. ET (1503 GMT), the benchmark 10-year Treasury yield was down 3 basis points at 2.7632 percent. It fell to 2.7480 percent last Thursday, which was the lowest since April 4, Refinitiv data showed.

The two-year yield hit earlier Monday 2.6180 percent, which was the lowest since Aug. 23.

The gap between two-year and 10-year yields narrowed to 8.9 basis points, the tightest level in over a decade, before bouncing back to 15.2 basis points.

The Treasury will sell $40 billion in two-year notes at 11:30 a.m. (1630 GMT), followed by $41 billion of five-year debt on Wednesday and $32 billion in seven-year securities on Thursday.

In "when-issue" activity, traders expected the upcoming two-year Treasury supply to sell at a yield of 2.612 percent , which would be lowest yield for this maturity at an auction since June.