July 19, 2018 / 2:45 PM / 5 months ago

TREASURIES-U.S. yield curve flattens after upbeat data

    * U.S. to sell $13 bln in 10-year TIPS at 1 p.m. 
    * U.S. jobless claims hits lowest in over 48-1/2 years
    * Philly Fed's business index rises more than forecast 

    By Richard Leong
    NEW YORK, July 19 (Reuters) - The U.S. yield curve
flattened, close to levels not seen in 11 years, on Thursday as
encouraging readings on jobs and business activity reinforced
the view of further increases from the Federal Reserve.
    Expectations that inflation would stay relatively tame,
together with worries about the Trump administration's trade
policy against China and other U.S. trade partners rekindled
investors to favor longer-dated government issues over
short-dated ones, analysts and traders said.
    Federal Reserve Chairman Jerome Powell's two-day testimony
before Congress, which concluded on Wednesday, supported the
curve flattening move.
    "It's staying the course at this point from Powell," said
Larry Milstein, head of government and agency trading at R.W.
Pressprich & Co in New York. "He's optimistic on the economy,
and we can expect more rate hikes."
    The futures market implied traders saw a 61 percent chance
the Fed would increase its target range on key interest rates
twice more this year, CME Group's FedWatch program
showed.
    At 10:29 a.m. (1429 GMT), the spread between 2-year and
10-year Treasury yields narrowed to 24.90 basis
points. This was within striking distance of 23.40 basis points,
which was the flattest level since July 2007, Reuters data
showed.
    Benchmark 10-year note yield reached a
three-week peak at 2.897 percent before retreating to 2.860
percent, down 1.5 basis points from Wednesday.
    Two-year yield touched 2.632 percent earlier
Thursday, which was the highest since August 2008. It was last
at 2.607 percent, marginally lower on the day.
    Against the mild inflation backdrop, the Treasury Department
will sell $13 billion worth of 10-year Treasury Inflation
Protected Securities at 1 p.m. (1700 GMT).
    "It won't be a sloppy auction. Inflation could bubble up in
the medium term so there should be demand for this asset class,"
Milstein said. 
    Thursday's readings on unemployment and regional business
conditions strengthened the case for Fed policymakers to
continue their rate-hike campaign.
    U.S. workers filed the fewest first-time claims on jobless
benefits in more than 48-1/2 years last week, the Labor
Department said.
    Meanwhile, the Philadelphia Fed's barometer on business
activity in the U.S. Mid-Atlantic region increased more than
expected in July.
    Still, trade tension remains a top worry among investors.
    The European Union's trade commissioner Cecilia Malmstrom
said on Thursday she hopes an EU mission to Washington will ease
a trans-Atlantic trade dispute but the bloc is preparing a list
of U.S. imports to hit if the United States imposes tariffs on
EU cars.
    
July 19 Thursday 10:33AM New York / 1433 GMT
                               Price                  
 US T BONDS SEP8               145-4/32     13/32     
 10YR TNotes SEP8              120-52/256   5/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.96         1.997     -0.005
 Six-month bills               2.1025       2.1545    -0.013
 Two-year note                 99-204/256   2.6073    -0.004
 Three-year note               99-216/256   2.6797    -0.008
 Five-year note                99-104/256   2.754     -0.014
 Seven-year note               99-140/256   2.8221    -0.015
 10-year note                  100-40/256   2.8564    -0.019
 30-year bond                  103-4/256    2.9717    -0.017
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       24.80        -1.05     
 30-year vs 5-year yield       21.60        0.00      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        22.50        -0.25    
 spread                                               
 U.S. 3-year dollar swap        20.25         0.25    
 spread                                               
 U.S. 5-year dollar swap        14.25         0.50    
 spread                                               
 U.S. 10-year dollar swap        6.50         0.00    
 spread                                               
 U.S. 30-year dollar swap       -4.75         0.25    
 spread                                               
 
    

    
 (Reporting by Richard Leong; editing by Jonathan Oatis)
  
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