TREASURIES-Virus concerns stoke buying; 2-year yield below 1% for first time since 2016

(Updates with market activity after comments by Fed's Powell, analyst comment) By Ross Kerber and Dhara Ranasinghe BOSTON / LONDON, Feb 28 (Reuters) - Money continued to pour into U.S. Treasuries on Friday on coronavirus concerns, sending the yield on the two-year note below 1% for the first time since 2016 and adding to pressure on central bankers to cut interest rates. Yields on longer-term Treasuries were also down sharply, with the benchmark 10-year note down 16 basis points in afternoon trading at 1.1388%. At one point Friday afternoon the 10-year yield reached 1.1159%, marking a record low for the fourth consecutive day, after comments by Federal Reserve Chair Jerome Powell cast doubt on whether the U.S. central bank would act quickly on rates. Six countries reported their first cases of the coronavirus as the world prepared for a pandemic and investors fearing a global recession dumped equities. With world stock markets set for their biggest weekly decline since the 2008 global financial crisis, investors flocked to safe-haven U.S. government bonds. The trading also reflected expectations that major central banks will cut borrowing costs to offset economic shocks. A sharp two-day spike in April federal funds futures left the implied fed funds rate at 1.23% on Friday. Traders now see a 100% chance of at least a 25-basis-point cut to the current 1.50%-1.75% target rate at the Fed's March meeting, according to the CME FedWatch tool. The latest low on the 10-year came shortly after a statement by Powell that while the U.S. economy was solid the central bank would "act as appropriate" to support it. Treasury yields initially rose on the statement, perhaps induced by automated trading programs, but then fell as fixed-income investors decided the Fed was in no rush to cut rates, said Mary Ann Hurley, vice president for fixed income trading at D.A. Davidson. Bond investors had already expected the Fed would 'act as appropriate,' in Powell's words. "We knew that already," Hurley said. The two-year U.S. Treasury yield was down 22.4 basis points at 0.8795%, hovering around its lowest level since late 2016. The two-year yield is seen as a market proxy for fed funds, and the drop widened the differential with the target rate to more than 50 basis points, which could add pressure on the Fed to cut so as to keep the costs of short-term money aligned. The movement also steepened the portion of the U.S. Treasury yield curve measuring the difference between yields on two- and 10-year Treasury notes. It was at 25.7 basis points, up 11.7 basis points from Thursday's close, after reaching as high as 27 basis points. However, even though the market had priced in rate cuts, it is not clear that they would address the root public-health concerns driving trading, said Subadra Rajappa, head of U.S. rates strategy for Societe Generale. The situation facing Fed policymakers now, she said, was "more a supply shock than any meaningful slowdown in the economic data. It puts them in a tough spot. It's not clear that rate cuts would have a meaningful impact on stabilizing what is ultimately a fear factor in the market," she said. D.A. Davidson's Hurley said Fed policymakers may also be reluctant to lower rates after easing three times last year. "They're running out of bullets," she said. Earlier Friday, St. Louis Federal Reserve Bank President James Bullard said the Fed did not need to cut rates just because markets had priced in aggressive central bank action, but policymakers would be monitoring events closely before their March 17-18 meeting. February 28 Friday 3:06PM New York / 2006 GMT Price Current Net Yield % Change (bps) Three-month bills 1.255 1.2798 -0.174 Six-month bills 1.1125 1.1373 -0.178 Two-year note 100-124/256 0.8795 -0.224 Three-year note 101-122/256 0.8679 -0.225 Five-year note 101-2/256 0.9181 -0.189 Seven-year note 100-128/256 1.0507 -0.168 10-year note 103-100/256 1.1388 -0.160 30-year bond 108-16/256 1.6574 -0.126 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 6.50 3.00 spread U.S. 3-year dollar swap 5.00 4.00 spread U.S. 5-year dollar swap 4.00 2.75 spread U.S. 10-year dollar swap -4.00 1.50 spread U.S. 30-year dollar swap -38.00 -0.75 spread (Reporting by Ross Kerber and Dhara Ranasinghe; Editing by Dan Grebler and John Stonestreet)

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