TREASURIES-U.S. yield curve flattening marches on

    * Expected passage of U.S. tax bill fuels flattening move
    * U.S. 2-year yield touches 9-year high
    * Home builder sentiment leads week's U.S. housing data

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Dec 18 (Reuters) - The gap between U.S.
shorter-dated and longer-dated Treasury yields contracted to its
smallest in a decade on Monday on expectations the government
would increase its short-term borrowing with the possible
passage of the federal tax cut bill.
    The curve-flattening move has been underpinned on the view
the Federal Reserve would ratchet up short-term interest rates
even as long-term inflation appears to stay tame.
    "Curve flattening is into the third day of one of its most
intense periods this year. The last time flattening was this
fast was in May when the Fed appeared to confirm the year’s
second rate hike would arrive in June," FTN Financial interest
rate strategist Jim Vogel wrote in a research note.
    Last week, Fed policymakers signaled that they expected the
U.S. central bank would hike rates three times in 2018 on faster
economic growth from potentially lower taxes.  
    Top U.S. Republicans said on Sunday they anticipated
Congress would pass their tax overhaul plan this week.
Independent government analyses estimated the plan would tack on
at $1 trillion to the $20 trillion in national debt.

    Analysts expected the Treasury Department would raise its
issuance of Treasury bills and notes maturing out to five years
to finance an increase in the federal deficit from the tax
    An expected increase in Treasury supply, possibly in early
2018, added to the rise in short- to medium-term yields with
two-year yield hitting a fresh nine-year peak early
Monday at 1.857 percent.
    Five-year Treasury yield rose 1.4 basis points to
2.171 percent, just short of the 6-1/2-year high set last week.
    The spread between five-year and 30-year yields
 touched 51.9 basis points, a level not seen since
October 2007, before moving to 53.4 basis points, according to
    As the curve flattening has persisted, the Commitments of
Traders data released late Friday showed speculative net longs
in CBOT 30-year Treasury bond futures reached an all-time peak
of 100,910 contracts last Tuesday.
    On the data front, the National Association of Home Builders
will release its December data on its members' sentiment on the
domestic housing market at 10 a.m. (1500 GMT).
    Economists are monitoring whether the mild pickup in
mortgage rates in recent weeks has begun denting home sales and
    Analysts polled by Reuters forecast the NAHB housing market
index likely held steady at 70 points in December. 
    Reports on new and existing home sales will be released
later this week.
December 18 Monday 9:11AM New York / 1411 GMT
 US T BONDS MAR8               153-28/32    -0-13/32  
 10YR TNotes MAR8              124-68/256   -0-40/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.31         1.3324    0.015
 Six-month bills               1.4525       1.4833    0.005
 Two-year note                 99-208/256   1.8483    0.008
 Three-year note               99-192/256   1.9615    0.014
 Five-year note                99-52/256    2.1706    0.014
 Seven-year note               98-228/256   2.2986    0.020
 10-year note                  98-228/256   2.3762    0.021
 30-year bond                  100-216/256  2.7086    0.020
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       52.60        1.30      
 30-year vs 5-year yield       53.70        0.50      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        19.25         0.75    
 U.S. 3-year dollar swap        16.50         0.50    
 U.S. 5-year dollar swap         4.25         0.00    
 U.S. 10-year dollar swap       -1.50        -0.25    
 U.S. 30-year dollar swap      -20.00         0.00    

 (Reporting by Richard Leong; Editing by Jonathan Oatis)