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TREASURIES-Dim view of U.S. recovery pushes 5-year yield to record low

Credit: REUTERS/DADO RUVIC

The five-year Treasury yield hit a record low on Tuesday and the benchmark 10-year Treasury yield fell to a five-month bottom, indicating safe-haven demand from bond investors wary of a slow U.S. economic recovery.

By Kate Duguid

NEW YORK, Aug 4 (Reuters) - The five-year Treasury yield hit a record low on Tuesday and the benchmark 10-year Treasury yield fell to a five-month bottom, indicating safe-haven demand from bond investors wary of a slow U.S. economic recovery.

In North American trade, the five-year yield US5YT=RR fell to 0.189%, a fresh all-time low, after hitting successive record lows on Wednesday, Thursday and Friday of last week. The five-year yield reflects traders' expectations of where interest rates will be in five years' time. That means the market does not believe the recovery of the U.S. economy will be sufficiently stable for the Federal Reserve to raise interest rates before then.

"To the extent that the Fed is leaning towards a more dovish framework, or just because they're becoming increasingly concerned about the economic outlook... they might just decide to come with additional stimulus. That should leave rates lower for longer," said Michael Pond, head of global inflation-linked research at Barclays.

The 10-year yield US10YT=RR hit a low of 0.505%, the second-lowest yield ever recorded at that maturity. The lowest was hit on March 9 as the coronavirus pandemic was gathering steam in the United States, prior to the Fed's intervention in financial markets.

The moves in the bond market suggest a different story than that being told in the equity market; the S&P 500 index .SPX has nearly recovered to pre-crisis highs.

"The bond and stock markets seem to be looking at the data and expecting different outcomes, at least for now," said Kevin Giddis, chief fixed income strategist at Raymond James.

The bond market, Giddis said, remains skeptical about the prospects of a rebound in gross domestic product in the third quarter. The U.S. economy contracted at a rate of 32.9% in the second quarter, the worst hit since the Great Depression.

Additionally, he said "There is a concern about how much the stimulus package will help the economy, and its cost over time," said Giddis.

Negotiations between congressional Democrats and the White House on a new round of coronavirus relief have begun to move in the right direction, though the two sides remain far apart, the U.S. Senate's top Democrat said on Tuesday.

The 10-year yield was last down 5.6 basis points on the day at 0.507%. The 30-year yield US30YT=RR was down 6.3 basis points to 1.181%. The two-year yieldUS2YT=RR last down 0.6 basis point at 0.109%.

(Reporting by Kate Duguid; Editing by Dan Grebler and David Gregorio)

((Kate.Duguid@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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