TREASURIES-Curve flattens on Fed hike speculation, before supply

Mon Mar 24, 2014 1:00pm EDT

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(Adds quote, updates prices)
    * Two-, five-year notes underperform before supply
    * Treasury to sell $96 bln in 2-, 5-, 7-year notes this week
    * Twos/30s yield curve flattest since July
    * Fed buys $648 mln debt due 2024-2031

    By Karen Brettell
    NEW YORK, March 24 (Reuters) - The U.S. Treasuries yield
curve flattened on Monday, with long-dated debt prices gaining
while intermediate-dated debt prices fell, before the U.S.
government sells $96 billion in new debt to investors nervous
that the Federal Reserve may raise interest rates sooner than
expected.
    Short and intermediate-dated Treasuries yields have jumped
since Federal Reserve Chair Janet Yellen said Wednesday that the
central bank could raise rates six months after its current
bond-buying program ends, suggesting a potential hike could
happen as early as spring of 2015.
    "You're seeing a lot of activity in terms of curve trading,
money migrating ... out of the front-end and into the long end
of the market," said Richard Bryant, a managing director in
Treasuries trading at Mizuho Securities in New York. "The
market's interpretation is that they are moving up the timing in
terms of rate hikes."
    Two-year note yields rose as high as 0.47 percent
on Monday, the highest since September and up from 0.34 percent
before Yellen's remarks. Five-year note yields
increased to 1.77 percent, the highest since January 9 and
seven-year note yields rose to 2.34 percent, the
highest since January 23.
    The notes pared much of these losses to then trade flat as
10-year notes and 30-year bond prices turned positive.
    Benchmark 10-year notes were last up 4/32 in
price to yield 2.74 percent, having risen as high as 2.78
percent earlier on Monday. The yields have risen from around
2.66 percent since Yellen's comments.
    For the 30-year bond, prices rose 26/32 in price
to yield 3.57 percent, down from 3.70 percent earlier on Monday.
The yields have fallen from 3.62 percent before Yellen's
comments.
   Shorter-dated Treasuries also underperformed longer-dated
bonds as investors continued exiting trades that had bet that
the Treasuries yield curve would steepen.
    The spread between two-year notes yields and 30-year bonds
yields tightened to 313 basis points, the
narrowest since July. That spread had widened to 367 basis
points in November.
    Demand for intermediate-dated debt will be tested this week,
with the Treasury due to sell $32 billion in two-year notes on
Tuesday, $35 billion in five-year notes on Wednesday and $29
billion in seven-year notes on Thursday, in addition to $13
billion in reopened two-year floating rate notes on Wednesday.
    Weak technicals are adding to pressure on the market, with
five-year notes breaking above support levels for yields of
around 1.72 percent, said Jim Vogel, an interest rate strategist
at FTN Financial in Memphis, Tennessee.
    "That has people nervous in front of supply on Wednesday for
fives," he said.
    Corporate bond spreads, meanwhile, have tightened even as
Treasuries sell off, reflecting that investors are continuing to
accept lower returns for higher risks as they seek out any
incremental yields offered in fixed income products.
    Investment-grade corporate bond spreads narrowed to 1.20
 percentage points over Treasuries on Friday, the
lowest since 2007, while high-yield corporate bond spreads also
fell to 3.76 percent points, near their lowest level
since 2007, according to data by Merrill Lynch.
    Corporate bonds have been among the favorite investments of
pension funds and other investors struggling to hit high return
targets in a low interest rate environment.
    The Fed bought $648 million in Treasuries due from 2024 to
2031 on Monday as part of its ongoing purchases.

 (Editing by Bernadette Baum and Jonathan Oatis)
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