November 15, 2017 / 7:54 PM / a year ago

TREASURIES-U.S. yield curve flattest in 10 years as markets see more hikes

 (Adds new comment, updates prices, table)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Nov 15 (Reuters) - The gap between U.S.
short-dated and long-dated U.S. Treasury yields contracted to
its tightest in a decade after data showed a pickup in U.S.
underlying inflation and an unexpected rise in retail sales, as
the market priced in further interest rate hikes next year.
    The flattening of the yield curve reflects expectations that
the Federal Reserve will continue to raise rates, pushing yields
on the short end higher. At the same time, U.S. inflation,
although trending higher, will likely remain subdued, limiting
yields on longer-dated bonds.
    "The details of both reports for October's retail sales and
consumer (CPI) inflation were resilient enough to maintain the
FOMC along the short-end interest rate tightening path," said
John Herrmann, rates strategist at MUFG Securities Americas in
New York.
    The gap between U.S. two-year note and U.S. 10-year note
yields contracted to 63.4 basis points, the smallest since
November 2007.
    The difference in five-year and 30-year yields narrowed to
just under 75 basis points, the flattest in 
nearly two weeks.
    U.S. consumer prices edged up in October, and rising rents
and healthcare costs pointed to a gradual buildup in underlying
    "The Fed was already on track to press ahead with another
rate hike in December, not least because the unemployment rate 
has already fallen well below their end-year forecast," said
Michael Pearce, U.S. economist at Capital Economics in New York.
    "With signs that underlying inflation pressures are starting
to pick back up again, we think the Fed will need to step up the
pace of tightening next year, raising the Fed funds rate a total
of four times in 2018," he added.
    Another report showed U.S. retail sales unexpectedly rose
0.2 percent in October, with the data for September revised to
show sales jumping 1.9 percent rather than the previously
reported 1.6 percent advance.
    In afternoon trading, the 10-year Treasury yield
fell to 2.336 percent, from 2.381 percent late on Tuesday.
    The U.S. two-year yield was at 1.687 percent,
from 1.691 percent on Tuesday.
    U.S. 30-year bond yields slid to 2.784 percent,
down from Tuesday's 2.839 percent.
    Wednesday, Nov. 15 at 1435 EST (1935 GMT):
 US T BONDS DEC7               153-31/32    1-3/32    
 10YR TNotes DEC7              125-12/256   0-80/256  
                               Price        Current   Net
                                            yield     Change
                                            (pct)     (bps)
 Three-month bills             1.24         1.2612    -0.010
 Six-month bills               1.3675       1.3961    0.000
 Two-year note                 99-164/256   1.6875    -0.003
 Three-year note               99-218/256   1.8011    -0.011
 Five-year note                99-208/256   2.0399    -0.025
 Seven-year note               100-48/256   2.2207    -0.036
 10-year note                  99-56/256    2.3381    -0.043
 30-year bond                  99-80/256    2.784     -0.055
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        17.50        -1.00    
 U.S. 3-year dollar swap        16.50        -0.50    
 U.S. 5-year dollar swap         5.25        -0.50    
 U.S. 10-year dollar swap       -1.75         0.25    
 U.S. 30-year dollar swap      -24.75         0.25    
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Meredith
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