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U.S. YIELD CURVE - Bond sets low, market eases for Fed.

Steven Scheer

Reuters News, 22 August 1998, 05:31

NEW YORK, Aug 21 (Reuters) - U.S. Treasury market participants sent a clear and powerful statement to the Federal Reserve on Friday: lower interest rates or we'll do it for you.

In dramatic fashion, yields plunged across the curve, with the benchmark 30-year bond steamrolling through its historic low yield and pushing below the Fed's overnight lending target rate for the first time in nearly a decade.

"The market is making an emphatic statement that lower rates are to come and they are willing to bet on that," said Douglas Johnston, government bond analyst at Lehman Brothers. "Two easings are being priced into the market right now."

Indeed, two-year yields fell to an intraday low of 5.10 percent - its lowest since a brief jaunt to 5.01 percent on January 12 - helped by a monster wave of safe-haven buying amid steep drops in global stock markets.

"It has been wild; this is a panic market," said William Lloyd, head of credit market strategy and research at Barclays Capital. "People are flying to quality on the Concorde. There's no other place to put your money."

Meanwhile, the 30-year bond sank to a a new record low yield of 5.38 percent, smashing its prior low of 5.50 percent set on Monday, buoyed by a shift from spread products into long-term Treasuries.

In the process, the 30-year traded below the federal funds rate for the first time since late 1989-early 1990. But analysts pointed out that with overnight financing at a 5.0-percent rate, the bond was still holding "positive carry," meaning the cost of the money borrowed to finance the securities was lower than the yield on the securities.

Profit-taking pushed the two-year back to 5.24 percent and the bond to 5.45 percent late in the day, but market participants said new ranges had been established and 5.50 percent was seen as the high end for the 30-year rather than its prior place as the...