May 11, 2018 / 6:41 PM / 8 months ago

TREASURIES-Rate hikes, soft data flatten yield curve to decade low

 (Updates yields, auction details, table)
    By Kate Duguid
    NEW YORK, May 11 (Reuters) - The Treasury yield curve on
Friday was the flattest it had been since July 2007 as
shorter-dated yields rose on expectations the Federal Reserve
would hike U.S. interest rates in spite of weaker-than-expected
economic data this week. 
    The spread between the five-year and 30-year bond yields
 reached a session low of 26.2 basis points, its
narrowest since before the financial crisis in 2007. The spread
between two- and 10-year note yields bottomed out
at 41.0 basis points, the lowest since September 2007.
    Yields on shorter-dated notes have been rising faster than
those on longer-dated bonds. The short end of the curve, and the
two-year yield in particular, reflects traders'
expectations that the Fed will raise interest rates. The long
end, notably the 10-year yield, indicates market
sentiment about the future health of the economy and levels of
    The yield on the 10-year benchmark government bond fell on
Thursday as a smaller-than-expected increase in the consumer
price index in April reduced fears that domestic inflation is
picking up steam as the labor market tightens.
    "The data yesterday did not do any favors for the bearish
camp, given how low core CPI was," said Ian Lyngen, head of U.S.
rates strategy at BMO Capital Markets in New York. Bond bears
bet rising inflation and other economic and technical factors
will prompt investors to sell Treasuries, lowering prices and
lifting yields.
    Yields at the long end of the curve also fell this week as
the Treasury Department's auction of $73 billion in new supply
of U.S. debt was met with strong demand. The 30-year bonds
 sold at a yield of 3.130 percent, the highest for
that maturity at an auction since March 2017, Treasury data
showed. The yield at auction for the $25 billion in 10-year
notes was 2.995 percent, the highest since January 2014.
    The 10-year yield on Friday rose to a session high of 2.995
percent, still below the 3 percent level it broke above on
Wednesday. The two-year yield hit a weekly high of 2.543 percent
on both Thursday and Friday.
    Trader expectations that the Fed will raise rates in June is
100 percent, according to CME Group's FedWatch Tool. For a rate
hike in September, the current probability is 73.6 percent,
while the market remains divided over whether the Fed will make
a fourth rate hike at the December meeting.  
    May 11 Friday 2:28PM New York / 1828 GMT
 US T BONDS JUN8               143-1/32     -0-5/32   
 10YR TNotes JUN8              119-100/256  0         
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.87         1.9046    0.015
 Six-month bills               2.0025       2.0506    0.000
 Two-year note                 99-174/256   2.5431    0.005
 Three-year note               99-204/256   2.6959    0.006
 Five-year note                99-150/256   2.8399    0.007
 Seven-year note               99-144/256   2.9448    0.005
 10-year note                  99-36/256    2.975     0.004
 30-year bond                  100-56/256   3.1137    -0.007
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        21.50        -3.00    
 U.S. 3-year dollar swap        16.00        -2.50    
 U.S. 5-year dollar swap         8.75        -2.25    
 U.S. 10-year dollar swap        2.75        -1.75    
 U.S. 30-year dollar swap       -9.75        -1.25    

 (Reporting by Kate Duguid; Editing by David Gregorio)
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