September 15, 2017 / 7:35 PM / a year ago

TREASURIES-U.S. yield curve flattens on weak data before Fed meeting

    * Harvey blamed for weaker August industrial output, retail
    * Traders brush off North Korea's missile, London subway
    * U.S. 5-, 30-year yield spread tightest since early July
    * Companies raise nearly $55 bln in bond market - IFR

 (Updates market action, adds trader quote)
    By Richard Leong
    NEW YORK, Sept 15 (Reuters) - Yield spreads between
shorter-dated and longer-dated Treasuries contracted on Friday
as traders added to bets the Federal Reserve would wait until
the end of the year to raise rates and focus on its balance
sheet at next week's policy meeting.
    North Korea's latest missile launch over Japan and a bomb
explosion in the London subway were shrugged off by financial
    Longer-dated Treasury yields held steady, supported by
surprise drops in domestic retail sales and industrial output in
August, seen partly because of Hurricane Harvey, which revived
some concerns about economic growth in the third quarter.
    "It's a bit of pricing out of the extreme dovishness in the
front part of the yield curve," Boris Rjavinski, senior rate
strategist at Wells Fargo Securities in New York said of the
flattening of the yield curve.
    The yield spread between five-year and 30-year Treasuries
 contracted to 96 basis points, the tightest since
July 7, from 103 basis points a week earlier, Tradeweb data
    Friday's disappointing U.S. data came after a report earlier
this week that showed the strongest increase in consumer prices
in seven months, snapping a string of below-forecast readings.

    The consumer price index's 0.4 percent rise in August
revived bets the Federal Reserve would raise key short-term
borrowing costs at its Dec. 12-13 policy meeting, lifting
shorter and medium Treasury yields.
    "There is more optimism about a possible December rate hike
after the latest CPI number," said Larry Milstein, head of
agency and government trading at R.W. Pressprich & Co in New
    Interest rates futures implied traders saw as high as 58
percent chance on a December rate increase before finishing at
53 percent. This compared with 31 percent a week earlier, CME
Group's FedWatch tool showed.
    Fed policymakers are unlikely to change their cautious
stance on raising rates as they are widely expected to focus on
rolling out their plan to scale back the central bank's $4.2
trillion bond holdings at next week's meeting, analysts said.
    Traders also await policymakers' outlook on rates and the
economy as well as possible assessments of the impact from
Hurricanes Harvey and Irma.
    Industrial production fell 0.9 percent in August, its first
decline since January, and retail sales slid 0.2 percent last
month as Hurricane Harvey disrupted activity.

    The benchmark 10-year yield was 2.201 percent,
up marginally on the day. It hit a three-week peak at 2.225
percent on Thursday. 
    The yield on two-year Treasury notes was up 1.6
basis points at 1.384 percent. It touched 1.388 percent for a
second time earlier Friday, which was its highest since July 26,
Reuters data showed.
    U.S. debt supply was heavy this week with the Treasury
selling $56 billion of coupon-bearing supply. This was nearly
matched by companies that issued some $55 billion in high-grade
and junk bonds, according to IFR, a Thomson Reuters unit.
  Friday, Sept. 15 at 1524 EDT (1924 GMT):
 US T BONDS DEC7               155-1/32      0-2/32    
 10YR TNotes DEC7              126-72/256   -0-32/256  
                               Price        Current    Net
                                            Yield      Change
                                            (pct)      (bps)
 Three-month bills             1.0225       1.0393     -0.016
 Six-month bills               1.15         1.1726     0.003
 Two-year note                 99-190/256   1.3843     0.016
 Three-year note               99-142/256   1.5278     0.025
 Five-year note                99-38/256    1.8055     0.016
 Seven-year note               98-248/256   2.0348     0.017
 10-year note                  100-104/256  2.204      0.005
 30-year bond                  99-148/256   2.7708     -0.010
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
 U.S. 2-year dollar swap        25.25         0.50     
 U.S. 3-year dollar swap        21.00        -0.25     
 U.S. 5-year dollar swap         8.25         0.00     
 U.S. 10-year dollar swap       -3.50        -0.25     
 U.S. 30-year dollar swap      -33.50        -0.75     

 (Reporting by Richard Leong; Editing by Andrea Ricci and Grant
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