August 29, 2018 / 7:10 PM / 3 months ago

TREASURIES-Strong U.S. GDP revision moderates flattening of yield curve

(Recasts headline, lead; updates yields, auction news)

By Kate Duguid

NEW YORK, Aug 29 (Reuters) - U.S. Treasury yields were little changed on Wednesday afternoon as an overnight drop in longer-dated yields and a flattening of the yield curve were mostly reversed by an upward revision of U.S. second-quarter gross domestic product.

Investor appetite for risk rose, driving some selling of longer-dated bonds after growth in the quarter was revised to 4.2 percent, from the initial estimate of 4.0 percent. That marks the U.S. economy’s best performance in nearly four years and puts it on track to hit the Trump administration’s goal of 3 percent annual growth.

The GDP bump reversed most of the overnight fall in longer-dated yields - and curve flattening - that followed news that Italy may ask the European Central Bank for aid. A report in newspaper La Stampa said the government was worried by what might happen when it unveils new public spending targets in September.

An auction of $31 billion in seven-year notes was well-received on Wednesday afternoon, despite a $1 billion increase in supply from the July issuance. The bid-to-cover ratio, an indicator of overall interest, was 2.65, its strongest since January. Indirect bidders - traditionally used as an indicator of foreign interest - took 59.51 percent, the lowest since March. Direct bidders took 18.97 percent, the highest since December 2016.

The auction drove up prices on the seven-year, and indirectly contributed to some curve flattening. “Treasuries were trading off the lows of the day as volumes picked up into the auction and since the result have continued the bullish price action,” said Ben Jeffery, trading products analyst at BMO Capital Markets.

The yield curve, the difference between longer and shorter dated Treasury yields, had steepened on Monday and Tuesday. Benchmark 10- and 30-year bond yields rose as investors sold longer-dated Treasuries, reducing safe-haven positions on news the United States and Mexico had agreed to overhaul the North Atlantic Free Trade Agreement (NAFTA).

Bilateral talks between Canada and the United States began on Wednesday.

The yield on the U.S. benchmark 10-year Treasury note was down half a basis point from Tuesday’s close, last at 2.879. The 30-year bond yield was down 1.5 basis points, last at 3.018 percent.

The two-year note yield was up 0.8 basis points, last at 2.673 percent. The spread between two- and 10-year yields was down less than a basis point at 20.6 basis points.

Reporting by Kate Duguid; Editing by David Gregorio

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