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TREASURIES-Yields at three-month lows, yield curve flattens as coronavirus spreads

By Karen Brettell

(Adds auction results, yield curve inversion, IOER expectation, updates prices) * Coronavirus fears boost safety buying of Treasuries * Treasury sells $40 bln 2-year notes, $41 bln 5-yr notes * Fed expected to leave rates unchanged on Wednesday By Karen Brettell NEW YORK, Jan 27 (Reuters) - Benchmark U.S. Treasury yields fell to three-month lows on Monday as investors piled in on concerns about the economic impact of China’s spreading coronavirus, while part of the yield curve reinverted for the first time since December. Investors dialed back riskier positions, selling equities and buying bonds, as the death toll from the coronavirus outbreak in China rose to 81 and the virus spread to more than 10 countries, including France, Japan and the United States. Some health experts questioned whether China can contain the epidemic. “We’ve seen selling in equities, buying in safe havens. The news story is certainly about the coronavirus,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. “There is clearly going to be some economic impact, particularly as its coming at a major consumer holiday. It’s too early to assess what that might be or how it flows through to other economies, but China’s growth impulse is an extremely important one for the global economy,” LeBas said. Benchmark 10-year note yields fell as low as 1.60%, the lowest since Oct. 10. The yield curve between two-year and five-year notes inverted for the first time since December. It is unusual for longer-dated debt to yield less than shorter-dated notes, and typically indicates growing concerns about the economy. The three-month, 10-year yield curve also flattened to 6 basis points. That part of the curve is closely watched as a recession indicator. It inverted in March for the first time since the financial crisis, a signal that a recession is likely to follow in one-to-two years. The yield curve can uninvert and reinvert many times before a recession hits. It has traded in positive territory since October, when optimism that the United States and China would reach a trade deal boosted risk sentiment. The yield curve between two-year and 10-year notes , which is also watched as a recession signal, flattened to 15 basis points, the flattest since Nov. 29. Monday's drop in yields led to slightly soft demand for a $40 billion auction of two-year notes and a $41 billion sale of five-year notes on Monday. The Treasury Department will also sell $32 billion in seven-year notes on Tuesday. The Federal Reserve is expected to leave rates unchanged when it concludes its two-day meeting on Wednesday. Some analysts expect the U.S. central bank may increase the interest it pays on excess reserves (IOER) by five basis points to keep the rate closer to the middle of its target range, which it would likely explain as being a technical adjustment. January 27 Monday 3:25PM New York / 2025 GMT Price Current Net Change Yield % (bps) Three-month bills 1.515 1.5458 0.015 Six-month bills 1.515 1.5518 0.013 Two-year note 100-88/256 1.4429 -0.043 Three-year note 100-64/256 1.4135 -0.057 Five-year note 101-126/256 1.4349 -0.066 Seven-year note 101-124/256 1.5232 -0.076 10-year note 101-84/256 1.6029 -0.077 30-year bond 107-28/256 2.0547 -0.073 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 4.50 -1.25 spread U.S. 3-year dollar swap 2.00 -1.00 spread U.S. 5-year dollar swap -1.00 -1.00 spread U.S. 10-year dollar swap -6.25 -0.25 spread U.S. 30-year dollar swap -32.75 -0.75 spread (Reporting by Karen Brettell; editing by Jonathan Oatis and Tom Brown)