May 15, 2018 / 6:45 PM / 6 months ago

TREASURIES-Retail sales gain lifts U.S. 10-year yield to 7-year peak

    * Fed's Williams, Kaplan see gradual U.S. rate hikes on
track
    * Futures imply traders up bets on 3 more rate hikes in 2018
    * Two-year yield highest since August 2008
    * Five-year yield highest since 2009
    * U.S. yield curve bounces from flattest in over a decade

 (Updates market action, adds quote)
    By Kate Duguid and Richard Leong
    NEW YORK, May 15 (Reuters) - A solid rise in U.S. retail
sales in April supported hopes of pickup in economic growth in
the second quarter on Tuesday and touched off a selloff in the
Treasury debt market, propelling the benchmark 10-year note's
yield to a near seven-year high.
    A quicker pace of business and consumer activities, if
sustained, will likely allow the Federal Reserve to increase key
overnight borrowing costs in the coming months, analysts and
traders said.
    "It's a better start to the second quarter," said Thomas
Roth, head of U.S. Treasury trading at MUFG Securities America
in New York. "The Fed will likely go again in June."
    This view on the next Fed rate increase was reinforced by
comments from San Francisco Fed President John Williams and
Dallas Fed chief Robert Kaplan at separate public appearances.
    However, Williams and Kaplan downplayed the likelihood the
central bank is considering a faster pace of rate hikes as
productivity remains sluggish and inflation, while firming
towards the Fed's 2-percent goal, is not overheating.

    The 10-year Treasury yield reached 3.095 percent
which was its highest level since July 2011. It was last at
3.091 percent, up almost 10 basis points from late on Monday.
    Traders unloaded their bond holdings after the Commerce
Department said retail sales rose 0.3 percent last month,
matching analyst forecasts. The latest figures supported the
notion that consumer spending appeared on track to accelerate
after slowing sharply in the first quarter.
    The two-year yield, which is most sensitive to
traders' view on Fed policy, was up nearly 4 basis points at
2.585 percent after touching 2.585 percent, which was the
highest since August 2008, Reuters data showed.
    Interest rates futures implied traders now saw more than a
50 percent chance the Fed would raise rates three more times by
year-end.
    The five-year Treasury yield touched its highest
level in about nine years at 2.9323 percent.
    The Treasuries selloff steepened the yield curve from its
flattest level in more than decade. The spread between five-year
and 30-year yields grew by 1.5 basis points to
28.80 basis points, according to Tradeweb.
    Tuesday, May 15 at 1425 EDT (1825 GMT):
                               Price                    
 US T BONDS JUN8               140-27/32    -1-29/32    
 10YR TNotes JUN8              118-140/256  -0-180/256  
                               Price        Current     Net
                                            Yield       Change
                                            (pct)       (bps)
 Three-month bills             1.88         1.9153      0.016
 Six-month bills               2.035        2.0847      0.000
 Two-year note                 99-152/256   2.5889      0.042
 Three-year note               99-156/256   2.7617      0.061
 Five-year note                99-40/256    2.934       0.082
 Seven-year note               98-224/256   3.0556      0.096
 10-year note                  98-36/256    3.0926      0.098
 30-year bond                  98-32/256    3.223       0.095
                                                        
 DOLLAR SWAP SPREADS                                    
                               Last (bps)   Net Change  
                                            (bps)       
 U.S. 2-year dollar swap        21.25         0.50      
 spread                                                 
 U.S. 3-year dollar swap        15.50         0.25      
 spread                                                 
 U.S. 5-year dollar swap         8.00         0.00      
 spread                                                 
 U.S. 10-year dollar swap        2.75         0.25      
 spread                                                 
 U.S. 30-year dollar swap       -8.25         1.00      
 spread                                                 
 

    
 (Reporting by Kate Duguid and Richard Leong;
Editing by Dan Grebler and Bernadette Baum)
  
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