TREASURIES-Yields steady as funding pressures ease

       * Fed injects liquidity in short-term markets for fourth day
    * Fed interest rate policy in focus

    By Karen Brettell
    NEW YORK, Sept 20 (Reuters) - U.S. Treasury yields were
steady on Friday as the New York Federal Reserve conducted
another repo operation to ease conditions in the short-term
lending markets, and as investors continued to evaluate whether
further interest rate cuts this year are likely.
    The average interest rate banks charge each other to borrow
reserves overnight on Thursday fell below the upper-end of the
Federal Reserve's target range for the first time this week, as
the Fed flooded billions in cash into the banking system to
address turmoil in money markets.
    The New York Fed on Friday awarded $75 billion at its
repurchase agreement (repo) operation, the fourth operation this
week, after short-term funding costs soared to as high as 10% on
    “The repo focus has completely overwhelmed the focus on the
Fed,” said Brian Daingerfield, head of G10 FX Strategy, Americas
at Natwest Markets. “I think the market is quite focused on what
that means for longer-term funding costs.”
    High short-term funding costs can reduce demand for fixed
income including Treasuries as it makes it more expensive to
fund the positions.
    Fed Chairman Jerome Powell said on Wednesday that the Fed
will conduct repurchase operations as needed to keep the rate
within its target range.
    The U.S. central bank is expected, however, to introduce a
longer-term solution to ease conditions as funding stresses are
seen as likely to pick up again into year-end.
    Investors are also focused on whether further interest rate
cuts are likely this year, after the Fed cut benchmark rates for
the second time this year on Wednesday.
    New projections showed policymakers at the median expected
rates to stay within the new range through 2020. However, in a
sign of ongoing divisions within the Fed, seven of 17
policymakers projected one more quarter-point rate cut in 2019.

    “This has been a month where central banks have really
reserved fire,” Daingerfield said. “You have seen some
flattening of the curve, that reflects dovish disappointment not
just from the Fed but from central banks across the G10 this
    Benchmark 10-year notes             were last up 1/32 in
price to yield 1.772%, down from 1.774% on Thursday.
    The yield curve between two-year and 10-year notes
               has flattened to 3 basis points, from 7 basis
points before the Fed statement on Wednesday.
    Boston Fed President Eric Rosengren, who dissented from the
decision to cut interest rates this week, repeated on Friday
that monetary stimulus was not needed and posed its own

 (Editing by Nick Zieminski

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