November 22, 2017 / 7:38 PM / a year ago

TREASURIES-Prices gain as Fed minutes show Dec rate hike likely

 (Recasts with Fed minutes, adds quote, supply; updates prices)
    * Fed policymakers see "near term" rate hike
    * Durable goods orders fell in October
    * Treasury to sell $88 bln new notes next week

    By Karen Brettell
    NEW YORK, Nov 22 (Reuters) - U.S. Treasury prices gained
slightly after the minutes from the Federal Reserve’s latest
meeting on Wednesday affirmed market expectations that it will
hike rates in December, with trading volumes subdued before
Thursday’s Thanksgiving holiday.
    Many Fed policymakers expect that interest rates will have
to be raised in the "near term," according to the record from
the Oct. 31-Nov. 1 meeting, at which the Fed kept rates
    “December is basically baked in the cake,” said Justin
Lederer, an interest rate strategist at Cantor Fitzgerald in New
York. “After that you just have to keep watching the inflation
    Benchmark 10-year notes             gained 10/32 in price to
yield 2.32 percent, down from 2.36 percent on Tuesday.
    Interest rate futures traders are pricing in a 92 percent
chance of a December rate hike, according to the CME Group’s
FedWatch Tool.
    The yield curve between two-year notes and 10-year notes
               held near 10-year lows at 58.5 basis points,
after falling to 57.4 basis points on Tuesday, the flattest
level since late 2007.
    Recent flattening in the Treasury yield curve reflects
concerns about long-term growth and inflation even as the U.S.
central bank continues its path towards normalizing monetary
    “Inflation is not playing along with the pace of
normalization," said Lou Brien, a market strategist at DRW
Trading in Chicago. 
    "The confidence that the market is putting on a rate hike,
with the PCE core at levels that are as low as they’ve been in a
couple of years, means that the yield curve should flatten,”
Brien added. 
    The core personal consumption expenditures (PCE) price index
has consistently undershot the Fed's 2 percent target for more
than five years.
    Many of the Fed officials said in the meeting minutes that
the jobless rate appeared to be too low for inflation to remain
at its current weak level.
    Yields briefly fell earlier on Wednesday after data showed
that new orders for key U.S.-made capital goods unexpectedly
fell in October after three straight months of hefty gains, but
a sustained increase in shipments pointed to strong momentum in
the economy as the year winds down.             
    The Treasury Department said on Wednesday it will sell $88
billion in short- and intermediate-dated supply next week,
including $26 billion in two-year notes, $34 billion in
five-year notes and $28 billion in seven-year notes.

 (Editing by Susan Thomas and Bernadette Baum)
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