January 7, 2020 / 6:33 PM / 3 months ago

TREASURIES-Yields flat on mixed data; 10-year TIPS turn positive

(Adds TIPS section; updates yields)

By Kate Duguid

NEW YORK, Jan 7 (Reuters) - Yields were stable on Tuesday, little changed across maturities after mixed U.S. data, while 10-year Treasury Inflation Protected Securities real yields moved back above zero and five-year TIPS held at negative levels.

The U.S. trade deficit fell to a more than three-year low in November as imports declined further, weighed down by the Trump administration's trade war with China, and exports rebounded, suggesting the economy ended 2019 on solid footing.

"The trade balance was a lot more than anticipated, so that has positive implications for GDP being revised higher," said Mary Ann Hurley, vice president, fixed income trading at D.A. Davidson.

In other positive news, an Institute for Supply Management report on the U.S. services sector showed its Purchasing Managers Index at 55.0 in December, above expectations and the highest since August.

The ISM manufacturing index last week fell short of expectations as trade tensions between the United States and China slowed activity. "The non-manufacturing sector, which is the greater part of the economy, is definitely more important," said Hurley.

Still, further evidence of the contraction in manufacturing helped constrain yields on Tuesday. The 10-year yield was last 0.7 basis point higher at 1.818%.

The Commerce Department on Tuesday said new orders for U.S.-made goods fell in November, pulled down by declines in demand for machinery and transportation equipment.

The two-year yield, which reflects market forecasts for interest rates, was 0.1 basis point lower at 1.547%.

Five-year TIPS real yields remained in negative territory for the fourth trading day, falling on Jan. 3 to the lowest level since April 2017. Meanwhile, 10-year TIPS traded above zero after going negative on Jan. 3 for the first time since September 2019.

"I don't think it's that surprising that real yields have gone negative," said Jon Hill, U.S. rates strategist at BMO Capital Markets.

With the Fed having lowered overnight rates to just over 1.5%, anytime they approach their inflation target of 2%, that should produce negative real yields, said Hill.

"If anything I've been a little surprised by how long this process has taken," he said, explaining that the dip below zero did not happen sooner because of a significant drop in breakevens in July 2019 when the trade war intensified.

"Had breakevens even stayed close to 2% we would have gone negative on a real basis much faster."

On Tuesday afternoon the Treasury Department sold $38 billion of three-year notes to average demand. Direct bidders took 16.7% of the offering, indirect bidders took 47.5% and dealers took 35.8%. (Reporting by Kate Duguid; Editing by Steve Orlofsky and Grant McCool)

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