April 17, 2018 / 7:59 PM / 3 months ago

TREASURIES-U.S. yield curve flattens, despite easing geopolitical risk

 (Updates news, yields and table)
    By Kate Duguid
    NEW YORK, April 17 (Reuters) - The U.S. yield curve on
Tuesday was at its flattest in over a decade, driven by rising
short-dated Treasury yields and a fall at the long end, even as
geopolitical and trade risks eased. 
    Two-year yields were at a decade high of 2.399
percent as economic data from March supported further interest
rate hikes by the Federal Reserve in 2018. 
    U.S. homebuilding increased more than expected in March amid
a rebound in the construction of multi-family housing units,
despite weakness in the single-family segment. The data followed
a report on Monday from the U.S. Commerce Department that showed
retail sales in March rose 0.6 percent, after three months of
declines.
    "Even with the bad weather in March, the data has really
strengthened, supporting the view that the Fed will most likely
have to hike rates in June," said John Herrmann, director of
U.S. rates strategies at MUFG Securities in New York.
    While the rising yields on short-dated debt anticipate
interest-rate hikes, the fall at the long end suggests the
market has dim view of U.S. economic health in the long term -
that the first quarter's outcomes will not persist throughout
the year, or that the Fed will continue to increase interest
rates regardless of whether economic data weakens. 
    Longer-dated Treasuries are a global safe-haven investment.
Demand typically increases as geopolitical and market risk
rises, pushing down the long end of the yield curve. But
Tuesday's flattening followed a reduction in risk, suggesting
the trade indicates investors' views about U.S. economic
fundamentals. 
    "The flattening we saw several weeks ago was related to
risk. And at least in terms of daily headline thinking, there’s
less risk perceived that you have to worry about tomorrow," said
Jim Vogel, interest rate strategist, FTN Financial in Memphis,
Tennessee.  
    Beijing on Tuesday made a trade concession to the United
States by lifting a limit on foreign ownership of Chinese
carmakers. The announcement represents a major policy shift and
suggests China may be willing to negotiate in the ongoing trade
dispute between the two countries, reducing the possibility of
dramatic economic fallout.
    The muted reaction to Saturday's U.S.-led air strikes in
Syria suggests the market has grown less concerned about
possible retaliation.
    The spread between two- and 10-year Treasury bond yields
 hit 41.80 basis points, its lowest level since
2007. The spread between five- and 30-year yields
fell to 31.70 basis points, a low of more than a decade. 
    The benchmark 10-year government bond was last
at 2.819 below its last close at 2.832. 
    
      Tuesday, April 17 at 1547 EDT (1947 GMT):
                               Price                  
 US T BONDS JUN8               145-28/32    0-13/32   
 10YR TNotes JUN8              120-136/256  0-16/256  
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             1.76         1.7925    0.039
 Six-month bills               1.95         1.9968    0.005
 Two-year note                 99-188/256   2.3898    0.013
 Three-year note               99-146/256   2.525     0.006
 Five-year note                99-42/256    2.6813    -0.002
 Seven-year note               99-12/256    2.7766    -0.007
 10-year note                  99-104/256   2.8193    -0.013
 30-year bond                  99-224/256   3.0062    -0.024
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        29.25        -1.75    
 spread                                               
 U.S. 3-year dollar swap        23.25        -1.00    
 spread                                               
 U.S. 5-year dollar swap        12.25        -0.75    
 spread                                               
 U.S. 10-year dollar swap        3.50         0.25    
 spread                                               
 U.S. 30-year dollar swap      -12.50         0.75    
 spread                                               
 

 (Reporting by Kate Duguid
Editing by Nick Zieminski and Dan Grebler)
  
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