June 20, 2017 / 1:46 PM / 2 years ago

TREASURIES-Yield curve flattens as Fed stays hawkish amid low inflation

    * Fed's Rosengren: Low rates are risk to financial stability
    * US five-, 30-year yield curve flattest since 2007

    By Karen Brettell
    NEW YORK, June 20 (Reuters) - The U.S. Treasury yield curve
flattened to its lowest levels since December 2007 as more
hawkish Federal Reserve officials led intermediate-dated notes
to underperform long-term bonds, which are being supported by
falling inflation.
    Boston Fed President Eric Rosengren said on Tuesday that the
era of low interest rates in the United States and elsewhere
poses financial stability risks and that central bankers must
factor such concerns into their decision-making.             
    On Monday, New York Fed President William Dudley said
halting the rate-hiking cycle now would imperil the economy, and
unemployment at 4.3 percent now and inflation at 1.5 percent
were "a pretty good place to be.”             
    “The more the Fed beats in this relentlessly hawkish
message, the more the yield curve just ends up flattening on
it,” said Aaron Kohli, an interest rate strategist at BMO
Capital Markets in New York.
    The yield curve between five-year notes and 30-year bonds
               flattened to 107 basis points, the lowest since
December 2007.
    The yield curve has flattened as the Fed’s hawkishness
contrasts with weakening inflation.
    Data last Wednesday showed that the so-called core Consumer
Price Index (CPI), which strips out food and energy costs,
increased 1.7 percent year-on-year in May, the smallest rise
since May 2015.             
    That measure has fallen from a year-on-year rise of 2.2
percent in February.             
    “The Fed has been talking much more hawkishly than the past
in the context of the recent data,” said Kohli. “It’s not that
the levels are disturbing, it’s that the trend is really
    Five-year note yields           , which are among the most
sensitive to Fed policy, have jumped to 1.80 percent from a
six-month low of 1.67 percent on Wednesday, before the U.S.
central bank raised interest rates for the second time in three
    Thirty-year bond yields          , which are most influenced
by inflation expectations, by contrast have tumbled to 2.76
percent from 2.80 percent after the Fed’s rate hike last week.
    Benchmark 10-year notes             were last up 3/32 in
price to yield 2.18 percent, down from 2.19 percent late on

 (Editing by Bernadette Baum)
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