Bonds on track to post best year since 2014

By Karen Brettell

NEW YORK, Dec 31 (Reuters) - Longer-dated U.S. Treasuries look set to post their best return since 2014 on Tuesday, after concerns about the slowing U.S. economy prompted the Federal Reserve to cut interest rates three times this year.

Slowing growth that was worsened by the U.S.-China trade war, tepid inflation and concerns that the U.S. central bank went too far in raising rates last year prompted a radical shift in 2019 that at one point sent benchmark yields to their lowest levels since 2016.

The closely watched yield curve between two-year and 10-year notes US2US10=TWEB also inverted in August, signaling a likely recession in the next one to two years. It has since shifted to its steepest since October 2018.

Longer-dated debt gained this year on concerns that low inflation and weak growth will persist or worsen. Demand for yield, with many bonds in Europe and Japan trading in negative territory, added to their outperformance.

Thirty-year bonds returned 17.15% this year through Monday .MERGA30, according to Bank of America Merrill Lynch. Final data will not be updated until late on Tuesday.

Benchmark 10-year notes .MERGA10 have returned 9.03%through Monday.

In 2014, 30-year bonds returned 29.43% and 10-year notes returned 10.72%.

Optimism this month that U.S. growth is improving, and an increase in risk appetite after the United States and China agreed to the first phase of a trade deal, however, has eaten into the year's returns.

Yields hit session highs on Tuesday after U.S. President Donald Trump said the agreement will be signed on Jan. 15 at the White House.

Thirty-year bonds US30YT=RR are on track for a 2.83% loss this month and 10-year notes US10YT=RR are heading toward a 0.91% decrease.

Overnight funding markets were stable on Tuesday, indicating that the Fed has offset any potential year-end funding squeeze.

December 31 Tuesday 1:48PM New York / 1848 GMT

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

1.525

1.5564

0.000

Six-month bills US6MT=RR

1.55

1.5883

-0.008

Two-year note US2YT=RR

100-27/256

1.571

-0.002

Three-year note US3YT=RR

100-12/256

1.6086

0.014

Five-year note US5YT=RR

100-68/256

1.6943

0.013

Seven-year note US7YT=RR

99-112/256

1.8361

0.028

10-year note US10YT=RR

98-120/256

1.921

0.026

30-year bond US30YT=RR

99-176/256

2.3896

0.046

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

11.50

1.00

U.S. 3-year dollar swap spread

7.00

0.25

U.S. 5-year dollar swap spread

3.25

1.00

U.S. 10-year dollar swap spread

-2.75

0.75

U.S. 30-year dollar swap spread

-30.25

-0.25

(Reporting by Karen Brettell; Editing by Nick Zieminski and Richard Chang)

((karen.brettell@thomsonreuters.com; 646-223-6274))

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