January 17, 2018 / 7:39 PM / 7 months ago

TREASURIES-U.S. curve flattens as 2-year yields hit 9-year high

 (New throughout, updates prices and market activity, adds
comment and details on funding bill)
    * Five-year, 30-year spread hits lowest point in over a
decade
    * Two-year yields highest since 2008

    By Kate Duguid
    NEW YORK, Jan 17 - The U.S. yield curve flattened to a
decade-low spread between 5-year and 30-year yields and two-year
Treasury yields hit a nine-year high on Wednesday on
expectations the Federal Reserve will continue to tighten
monetary policy this year.
    At 43.7 basis points, the spread between 5-year and 30-year
yields hit its lowest level since August 2007.
    This is "a classic tale of two markets. The front end of the
curve is responding to the Fed’s insistence on continuing to
hike rates while the longer end of the curve is responding to a
more benign global inflation environment," said Ian Lyngen, head
of U.S. rates strategy at BMO Capital Markets in New York.
    Two-year yields, which are the maturity most
sensitive to Fed interest rate hikes, have been rising as robust
economic data has affirmed the FOMC's hawkish sentiment. Last
Friday's stronger-than-expected core CPI report increased the
odds of a March rate hike, with the rate futures market pricing
in a more than 70 percent chance, according to the CME's
FedWatch.
    As the continuing resolution, or stopgap funding bill, is
due to expire Friday, investors will be watching Congress to see
if it can put together a funding bill in time to avoid a U.S.
government shutdown. 
    The White House said on Wednesday it supports a short-term
bill to fund the government and prevent a shutdown, even though
its first preference would have been for a long-term deal.
 
    But it remains unclear whether Congress will back such a
bill. Republican Senator Lindsey Graham said he would not vote
for a bill from his own party, according to Politico. Democratic
Senator Robert Menendez said the White House is making
unacceptable demands on immigration measures.
    Thus far, the market has not moved on news of the tense
negotiations. "It has typically been an eleventh hour
decision...which I think the market always holds out for" said
Ellis Phifer, market strategist at Raymond James in Memphis. 
    The U.S. economy and inflation expanded at a
modest-to-moderate pace in the final months of 2017, while wages
continued to push higher, the Fed reported in its Beige Book
report on Wednesday.
    Later Wednesday, three Fed officials will speak: Cleveland
Fed President Loretta Mester, Chicago Fed President Charles
Evans and Dallas Fed President Robert Kaplan. 
    At 2:08 p.m.(1908 GMT), 10-year Treasury yields
were 2.561 percent, above Tuesday's close at 2.544 percent. 
Two-year yields were 2.039 percent, after hitting
2.047 percent earlier in the day, its highest since September
2008.
    
    January 17 Wednesday 2:11PM New York / 1911 GMT
                               Price                  
 US T BONDS MAR8               150-21/32    -0-5/32   
 10YR TNotes MAR8              122-196/256  -0-56/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.42         1.4449    0.000
 Six-month bills               1.595        1.6303    -0.003
 Two-year note                 99-176/256   2.039     0.021
 Three-year note               99-142/256   2.1545    0.027
 Five-year note                98-204/256   2.384     0.029
 Seven-year note               98-100/256   2.5036    0.028
 10-year note                  97-76/256    2.5628    0.019
 30-year bond                  98-92/256    2.8317    -0.003
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        19.50        -0.50    
 spread                                               
 U.S. 3-year dollar swap        18.25        -0.50    
 spread                                               
 U.S. 5-year dollar swap         5.00        -0.75    
 spread                                               
 U.S. 10-year dollar swap        0.50         0.00    
 spread                                               
 U.S. 30-year dollar swap      -17.25         0.75    
 spread                                               
 
 (Reporting by Kate Duguid; Editing by Phil Berlowitz and David
Gregorio)
  
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