April 27, 2018 / 2:52 PM / 6 months ago

TREASURIES-U.S. yield curve flattens as Q1 GDP beats forecast

    * U.S. 10-year yield holds below 3 pct, 2-year under 2.5 pct
    * U.S. Q1 GDP slows but less than forecast; ECI accelerates

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, April 27 (Reuters) - The margin between U.S.
shorter-dated Treasury yields and longer-dated ones shrank on
Friday as a smaller-than-expected decline in domestic economic
growth in the first quarter renewed bets the Federal Reserve
would stick to its rate-hike campaign to keep inflation in
check.
    U.S. gross domestic product, the government's broadest
economic gauge, grew at a 2.3 percent annualized pace in the
first three months of 2018, slower than the 2.9 percent rate in
the prior quarter, the government said. The recent GDP growth
came in stronger than the 2.0 percent increase forecast among
economists polled by Reuters.
    Another encouraging sign was a pickup in wage pressure. The
government's employment cost index rose 0.8 percent in the first
quarter, which was above the prior quarter's 0.6 percent. 
    "This gives more ammo to the Fed to tighten so it can get
ahead of inflation. The economy has good strength and inflation
seems to be picking up," said Mark Heppenstall, chief investment
officer at Penn Mutual Asset Management in Horsham,
Pennsylvania.
    At 10:34 a.m. (1434 GMT), the yield on 10-year Treasury
notes was down 2.8 basis points at 2.962 percent. It
reached 3.035 percent on Wednesday, its highest level since
January 2014. 
    Two-year note yield was down 1.2 basis points at
2.480 percent after it hit 2.508 percent two days ago, which was
last seen in September 2008.
    The gap between two-year and 10-year yields
narrowed by 1.8 basis points to 47.9 basis points after reaching
54.6 basis points on Thursday, its steepest level in a month. It
remained above the flattest level in over a decade set last week
at 41.1 basis points.
    Relatively solid demand for this week's $96 billion in
fixed-rate, coupon-bearing Treasuries reduced jitters about
investors' appetite for U.S. government debt. This revived
demand for longer-dated Treasuries, pushing the 10-year yield
back below 3 percent.  
    There have been concerns whether fund managers and foreign
central banks may pare their Treasury holdings as the U.S.
government is expected to ramp up its borrowing to cover a 
widening budget gap.
    Concerns about surging Treasury supply had pushed up U.S.
yields earlier this week. They were mitigated by disappointing
economic data in Europe and perceived dovish signals from the
European Central Bank and Bank of Japan, analysts said.
    Nevertheless, investors were not yet loading up on
Treasuries ahead of the government's latest projection of its
borrowing needs, the Fed's next two-day policy meeting and the
Labor Department's April payrolls report, which are scheduled
for next week, analysts said.
April 27 Friday 10:38AM EDT/ 1438 GMT
                               Price                   
 US T BONDS JUN8               143-3/32     0-23/32    
 10YR TNotes JUN8              119-128/256  0-48/256   
                               Price        Current    Net
                                            Yield %    Change
                                                       (bps)
 Three-month bills             1.79         1.8227     -0.005
 Six-month bills               1.9675       2.0144     -0.003
 Two-year note                 99-204/256   2.4797     -0.012
 Three-year note               99-82/256    2.615      -0.013
 Five-year note                99-196/256   2.8006     -0.018
 Seven-year note               99-180/256   2.9222     -0.026
 10-year note                  98-56/256    2.9605     -0.030
 30-year bond                  97-120/256   3.1311     -0.043
                                                       
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
                                            Change     
                                            (bps)      
 U.S. 2-year dollar swap        25.00        -0.25     
 spread                                                
 U.S. 3-year dollar swap        21.25        -0.25     
 spread                                                
 U.S. 5-year dollar swap        10.50        -0.25     
 spread                                                
 U.S. 10-year dollar swap        2.75         0.00     
 spread                                                
 U.S. 30-year dollar swap      -11.50         0.75     
 spread                                                
 

    
    

    
 (Reporting by Richard Leong; Editing by Dan Grebler)
  
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