July 19, 2018 / 7:05 PM / 10 months ago

TREASURIES-U.S. yield curve flattens as data support rate-hike bets

    * Demand at $13 10-year TIPS sales weakest in a year
    * Trump says 'not thrilled' about Fed rate hikes
    * U.S. jobless claims hit lowest in over 48-1/2 years
    * Philly Fed's business index rises more than forecast 

 (Updates market action, adds quote)
    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
upbeat data on the jobs market and business activity reinforced
the view of further interest rate increases from the Federal
    Treasury yields fell across the board, reversing an earlier
rise, as weaker prices on Wall Street stocks stoked some
safe-haven demand for U.S. government bonds.
    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' favoring 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
    That view was not altered even after President Donald Trump
told CNBC television he was "not thrilled" about interest rate
    The spread between 2-year and 10-year Treasury yields
 narrowed to 25.10 basis points. This was within
striking distance of 23.40 basis points, which was the flattest
level since July 2007, Reuters data showed.
    The rest of the curve was mostly flatter with the exception
of the five-year to 30-year part which steepened to 22.50 basis
    "The path of least resistance is still more flattening but
at a slower pace," said George Goncalves, head of U.S. rates
strategy at Nomura Securities International in New York.
    The benchmark 10-year note yield reached a
three-week peak at 2.897 percent before retreating to 2.845
percent, down 3 basis points from Wednesday.
    Two-year yield touched 2.632 percent earlier on
Thursday, which was the highest since August 2008. It was last
at 2.595 percent, down 1.6 basis points on the day.
    Against the mild inflation backdrop, the Treasury Department
sold $13 billion worth of 10-year Treasury Inflation Protected
    The ratio of bids to the amount of 10-year TIPS offered was
2.22, the lowest reading since July 2017, Treasury data showed.
    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 for 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 said the bloc is preparing a
list of U.S. imports to hit if the United States imposes tariffs
on EU-built cars.
July 19 Thursday 2:50PM New York / 1850 GMT
 US T BONDS SEP8               145-9/32     18/32     
 10YR TNotes SEP8              120-80/256   8/32      
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.9575       1.9944    -0.008
 Six-month bills               2.0975       2.1493    -0.019
 Two-year note                 99-210/256   2.5949    -0.016
 Three-year note               99-228/256   2.6633    -0.025
 Five-year note                99-122/256   2.7387    -0.029
 Seven-year note               99-164/256   2.8072    -0.030
 10-year note                  100-64/256   2.8454    -0.030
 30-year bond                  103-32/256   2.9663    -0.023
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       24.90        -0.95     
 30-year vs 5-year yield       22.60        0.95      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        22.75         0.00    
 U.S. 3-year dollar swap        20.50         0.50    
 U.S. 5-year dollar swap        14.25         0.50    
 U.S. 10-year dollar swap        6.50         0.00    
 U.S. 30-year dollar swap       -5.00         0.00    

 (Reporting by Richard Leong; Editing by Dan Grebler and Susan
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