July 20, 2018 / 7:22 PM / a year ago

TREASURIES-Trump's Fed worries steepen yield curve to three-week high

 (Adds CNBC news, analyst comment, updates yields)
    By Kate Duguid
    NEW YORK, July 20 (Reuters) - The U.S. yield curve reached
its steepest level in more than three weeks on Friday afternoon
as President Donald Trump criticized the speed of the Federal
Reserve's pace of rate hikes. 
    The long end of the curve, which reflects sentiment about
rising inflation and the health of the economy, moved higher
while short-dated maturities held steady.
    Trump is concerned the central bank will raise interest
rates another two times this year, a White House official told
    Earlier on Friday Trump questioned the Fed's expected pace
of hikes in posts on Twitter, saying it takes away from the
United States' "big competitive edge" and could hurt the U.S.
economy. Trump also criticized Fed policy in an interview on
CNBC on Thursday.
    The prospect that Trump's comments will encourage Fed Chair
Jerome Powell to slow the pace of hikes this year pushed yields
on longer-dated Treasury bonds up. 
    The 30-year Treasury bond yield was up 6.6 basis
points from Thursday's close to a session high of 3.03 percent.
The yield on the benchmark 10-year note was as high
as 2.90 percent, up 5 basis points from its last close. 
    At the short end of the curve, the two-year note yield
 increased by 1.2 basis points from Thursday's close
at 2.60 percent. 
    "We have above full employment, and if Trump is successful
in getting the Fed to back off its rate hikes, that has the
potential to create an overheating economy and rising
inflation," said Mary Ann Hurley, vice president in fixed income
at D.A. Davidson in Seattle.
    The spread between the five- and 30-year Treasury yield
 rose by 4.9 basis points to a session high of
27.2 basis points on Friday, with the spread between two- and
10-year yields up by as much as 5.5 basis points
to 29.8. 
    In spite of the curve steepening, the futures market implied
traders' expectations the Federal Open Market Committee will
raise rates at its Sept. 26 meeting were little moved, CME
Group's FedWatch program showed. The probability of a fourth
rate hike in December rose from 53.69 percent on Thursday to
55.59 percent on Friday. 
    "We're almost at the point where we've priced in two hikes
fully," said Bruno Braizinha, interest rates strategist at
Societe Generale in New York. He said that may suggest that the
curve had, before Thursday, flattened nearly as far as it could
go absent economic news. No significant U.S. economic data was
published on Friday.
      July 20 Friday 3:09PM New York / 1909 GMT
 US T BONDS SEP8               144-5/32     -1-4/32   
 10YR TNotes SEP8              120          -0-76/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.94         1.9762    -0.018
 Six-month bills               2.0925       2.1437    -0.005
 Two-year note                 99-208/256   2.5994    0.004
 Three-year note               99-218/256   2.677     0.011
 Five-year note                99-92/256    2.7645    0.024
 Seven-year note               99-96/256    2.8498    0.040
 10-year note                  99-216/256   2.8931    0.046
 30-year bond                  101-212/256  3.0313    0.064
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        23.00         0.50    
 U.S. 3-year dollar swap        20.50         0.25    
 U.S. 5-year dollar swap        14.25         0.00    
 U.S. 10-year dollar swap        6.00        -0.50    
 U.S. 30-year dollar swap       -6.50        -1.50    

 (Reporting by Kate Duguid; Editing by Dan Grebler)
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