May 14, 2018 / 2:53 PM / a year ago

TREASURIES-U.S. yields edge up with Europe, curve stays flattest in a decade

    * Rate comments from ECB, Fed officials lift bond yields
    * U.S. 2-year yield climb to highest since August 2007

 (Updates market action, adds quote, table)
    By Richard Leong
    NEW YORK, May 14 (Reuters) - U.S. Treasury yields notched
higher on Monday, with the 10-year yield holding below 3
percent, moving in step with an increase in their European
counterparts following comments from a European Central Bank
    ECB policy-maker and Bank of France governor Francois
Villeroy de Galhau said the central bank could give fresh
guidance on the timing its first interest rate increase as the
end approaches of its 2.55 trillion euro bond purchase program.

    Remarks on further U.S. interest rate hikes from Cleveland
Federal Reserve President Loretta Mester also lifted U.S. yields
from their overnight lows, analysts said.
    "It's the Villeroy comment. Mester didn't help with her
typically hawkish remarks," Stone & McCarthy Research Associates
market strategist John Canavan said of the factors behind the
uptick in U.S. yields.
    At 10:42 a.m. (1424 GMT), benchmark 10-year Treasury yield
 was over 2 basis points higher at 2.995 percent. 
    The 10-year yield has traded in a tight range since hitting
3.035 percent 2-1/2 weeks ago, which was its highest level since
January 2014, according to Reuters data.
    German 10-year yield reached 0.614 percent, a
2-1/2 week peak in the wake of Villeroy's comment.
    The U.S. two-year yield, which is more sensitive
to traders' view on Fed policy, rose nearly 1 basis point to
2.547 percent after touching 2.552 percent, the highest since
August 2008.
    Traders expect the U.S. central bank will raise key
overnight borrowing costs at least two more times in 2018, with
the next hike likely at its June 12-13 policy meeting.
    "June (rate hike) is pretty much baked in," Canavan said.
"We are still expecting to see the Fed to tighten further into
    Traders' view of more rate hikes, together with
weaker-than-expected data on jobs and inflation in April, has
caused investors to increase their curve flattening positions,
where they favor longer-dated Treasuries over shorter-dated
issues, analysts said.
    The spread between five-year and 30-year Treasury yields
 was 27.2 basis points, roughly 1 basis point
wider from late Friday. The gap had narrowed slightly below 26
basis points earlier Monday, which was the slimmest since July
2007, Tradeweb data showed.
May 14 Monday 10:44AM EDT/ 1444 GMT
 US T BONDS JUN8               142-22/32    -0-14/32   
 10YR TNotes JUN8              119-64/256   -0-40/256  
                               Price        Current    Net
                                            Yield %    Change
 Three-month bills             1.875        1.9096     0.005
 Six-month bills               2.005        2.0531     0.002
 Two-year note                 99-172/256   2.5474     0.008
 Three-year note               99-200/256   2.7014     0.008
 Five-year note                99-136/256   2.8519     0.014
 Seven-year note               99-120/256   2.9599     0.020
 10-year note                  98-252/256   2.9933     0.022
 30-year bond                  99-252/256   3.1258     0.015
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
 U.S. 2-year dollar swap        20.00        -2.00     
 U.S. 3-year dollar swap        15.00        -1.50     
 U.S. 5-year dollar swap         7.75        -1.00     
 U.S. 10-year dollar swap        2.25        -0.50     
 U.S. 30-year dollar swap       -9.50         0.00     

 (Reporting by Richard Leong
Editing by Nick Zieminski)
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