November 14, 2017 / 8:48 PM / a year ago

TREASURIES-U.S. 2-year note yield hits fresh 9-year high as curve flattens

 (Adds comment, updates prices, table)
    * U.S. yield curve flattens for second straight day
    * Fed's Bostic says flat, inverted curve does not mean

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Nov 14 (Reuters) - U.S. Treasury two-year note
yields touched a nine-year high on Tuesday, while those on
long-dated debt fell as the yield curve flattened for a second
straight day and investors braced for the next tightening by the
Federal Reserve in December.
    A flattening of the yield curve typically suggests the Fed
is on track to raise U.S. interest rates, pushing yields on the
short end higher, while low inflation is seen limiting those on
longer-dated bonds.
    U.S. benchmark 10-year yields hit a nearly three-weak peak
after data showed U.S. producer prices rose a more-than-
expected 0.4 percent last month, boosting the PPI 2.8 percent in
the 12 months through October for the biggest annual increase in
wholesale inflation in more than 5-1/2 years.
    Even though yields on both the two-year and the 10-year rose
after the U.S. data, the curve continued to tighten.
    The yield gap between shorter-dated and longer-dated
Treasuries shrank, with the spread between U.S. two-year note
yields and U.S. 10-year note yields contracting to 69 basis
    The spread between five-year and 30-year yields also
flattened to 77.20 basis points. That was the
narrowest in nearly two weeks.
    "The flattening in the U.S. curve is mostly an outgrowth of
Fed hikes in a low inflation environment and ... tends to be
associated with lower growth and higher risks premiums in the
future," said Richard Franulovich, head of FX strategy at
Westpac in New York.
    Franulovich noted that if the Fed were to pursue as many as
five rate hikes in 2018 and 2019, as indicated in its so-called
dot plots, in a persistently sub-par inflation environment, real
fed funds will move significantly higher and likely invert the
    An inverted yield curve usually precedes economic slowdowns,
if not recessions.
    But Atlanta Fed President Raphael Bostic on Tuesday said a
flatter curve may reflect safe-haven investing and confidence in
the U.S. economy and, were the trend to lead to an inverted
yield curve, it would not necessarily signal a pending
    In late trading, the 10-year Treasury yield was
at 2.378 percent, down from 2.4 percent late on Monday. Earlier,
U.S. 10-year yields hit 2.414, the highest since late October. 
    The U.S. two-year yield hit a nine-year peak just
shy of 1.7 percent, up from Monday's 1.687 percent.
    U.S. 30-year bond yields, on the other hand, fell to 2.836
percent, from 2.869 percent on Monday.
      Tuesday, Nov. 14 at 1520 EST (2020 GMT):
 US T BONDS DEC7               152-28/32    0-15/32   
 10YR TNotes DEC7              124-188/256  0-28/256  
                               Price        Current   Net
                                            yield     change
                                            (pct)     (bps)
 Three-month bills             1.2475       1.2689    0.054
 Six-month bills               1.3675       1.3961    0.026
 Two-year note                 99-162/256   1.6913    0.004
 Three-year note               99-210/256   1.8118    -0.005
 Five-year note                99-180/256   2.0632    -0.010
 Seven-year note               99-244/256   2.2572    -0.015
 10-year note                  98-216/256   2.3806    -0.019
 30-year bond                  98-60/256    2.8378    -0.031
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        18.75        -0.75    
 U.S. 3-year dollar swap        17.25        -0.50    
 U.S. 5-year dollar swap         5.75        -0.50    
 U.S. 10-year dollar swap       -2.00        -0.50    
 U.S. 30-year dollar swap      -25.00         0.00    
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Meredith
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