September 15, 2017 / 4:10 PM / a year ago

TREASURIES-U.S. yield curve flattens on weak U.S. data

    * Harvey blamed for weaker August industrial output, retail
    * Traders brush off North Korea's missile, London subway
    * U.S. 5-year, 30-year yield spread tightest since early

 (Updates market action, adds 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 were little changed, capped by
surprise drops in domestic retail sales and industrial output in
August 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 95 basis points, the tightest since
July 7, before widening to 97 basis points, according to
    Friday's disappointing U.S. data came after a report earlier
this week that showed the strongest increase in consumer prices
in seven months.
    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, but it did not
alter the current view that the central bank would not raise
rates much further from current levels.
    "It's going to be hard for the front end to price in for a
more aggressive Fed," said Jim Caron, portfolio manager at
Morgan Stanley Investment Management in New York.
    Interest rates futures implied traders saw a 58 percent
chance on a December rate increase, up from 52 percent at
Thursday's close, 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.

    At 11:11 a.m. EDT (1511 GMT), the benchmark 10-year yield
 was 2.208 percent, up 1 basis point on the day. It
hit a three-week peak at 2.225 percent on Thursday. 
    The yield on two-year Treasury notes, which is
sensitive to traders' view on Fed policy, 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.
  September 15 Friday 11:12AM New York / 1512 GMT
 US T BONDS DEC7               154-30/32    -0-1/32   
 10YR TNotes DEC7              126-72/256   -0-32/25  
                               Price        Current   Net
                                            Yield %   Change
 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               99-146/256   1.5225    0.020
 Five-year note                99-40/256    1.8039    0.015
 Seven-year note               98-244/256   2.0372    0.019
 10-year note                  100-96/256   2.2075    0.009
 30-year bond                  99-116/256   2.777     -0.004
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        25.00         0.25    
 U.S. 3-year dollar swap        21.00        -0.25    
 U.S. 5-year dollar swap         8.00        -0.25    
 U.S. 10-year dollar swap       -3.25         0.00    
 U.S. 30-year dollar swap      -33.00        -0.25    

 (Reporting by Richard Leong; Editing by Andrea Ricci)
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