December 15, 2017 / 8:19 PM / 8 months ago

TREASURIES-U.S. yield curve turns flattest in a decade

    * U.S. 30-year yield touches lowest levels since September
    * Mild data misses fail to diminish solid U.S. GDP views
    * Asset managers pile into curve flatteners - CFTC data

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Dec 15 (Reuters) - The margin between U.S.
shorter-dated and longer-dated Treasury yields shrank to its
smallest in a decade on Friday, based on traders' expectations
that the Federal Reserve would increase short-term interest
rates further and long-term inflation would stay tame.
    A wave of yield curve-flattening trades emerged after Fed
policymakers released their latest outlook on Wednesday and
projected three interest rate increases in 2018.
    Moreover, Fed Chair Janet Yellen said at her last news
conference as the head of the U.S. central bank that
policymakers had upgraded their U.S. growth forecasts but stuck
with their inflation view even as they considered a possible tax
cut from Washington.
    "That sparked the extra kicker for curve flatteners the last
couple of days," said Thomas Roth, head of U.S. Treasury trading
at MUFG Securities America in New York. "People are very
comfortable with holding long-dated paper."
    The yield spread between five-year and 30-year Treasuries
 contracted to 52.80 basis points, a level last
seen in October 2007. It later ticked up to 53.1 basis points,
compared with 56.6 basis points on Thursday, Reuters and
Tradeweb data showed.
    The five-year and 30-year yield gap has narrowed by 60 basis
points since late December.
    Asset managers have been building their curve flattening
positions in the futures market in recent weeks, while leveraged
funds have taken the opposing trade - curve steepeners, where
they bet longer-term yields would rise faster than short-term
yields, according to the latest Commitment of Traders data from
the Commodity Futures Trading Commission.
    "We haven't seen the end of this (flattening) dynamic. It
could go to zero," said Craig Bishop, lead strategist of U.S.
fixed income strategies at RBC Wealth Management in Minneapolis.
    The yield curve flattened during a mild selloff in U.S.
government debt as optimism about the passage of the federal tax
cuts helped push the S&P 500 stock index to a record
high.
    Hopes of higher spending and investment from lower taxes
overshadowed mildly weaker-than-forecast data on industrial
output and business activity in New York state, traders and
analysts said.
    The yield on benchmark 10-year Treasury notes
was 2.360 percent, up over 1 basis point from late on Thursday.
    The two-year yield rose 3 basis points to 1.840
percent, short of the more than nine-year peak of 1.852 percent
set on Wednesday.
    On the other hand, the 30-year yield touched
2.690 percent, its lowest since Sept. 8.
December 15 Friday 2:54PM New York / 1954 GMT
                               Price                  
 US T BONDS MAR8               154-7/32     0-4/32    
 10YR TNotes MAR8              124-104/256  -0-40/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.295        1.3171    0.002
 Six-month bills               1.445        1.4756    0.003
 Two-year note                 99-212/256   1.8399    0.029
 Three-year note               99-200/256   1.9506    0.033
 Five-year note                99-66/256    2.1588    0.031
 Seven-year note               99           2.2813    0.019
 10-year note                  99-12/256    2.3583    0.012
 30-year bond                  101-56/256   2.6904    -0.020
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       51.70        -1.75     
 30-year vs 5-year yield       53.00        -3.60     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        18.50        -1.25    
 spread                                               
 U.S. 3-year dollar swap        16.25        -1.25    
 spread                                               
 U.S. 5-year dollar swap         4.00        -1.25    
 spread                                               
 U.S. 10-year dollar swap       -1.75        -1.00    
 spread                                               
 U.S. 30-year dollar swap      -20.50         0.25    
 spread                                               
 
    

    
 (Reporting by Richard Leong; Editing by Lisa Von Ahn and Chizu
Nomiyama)
  
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