July 18, 2018 / 6:49 PM / 5 months ago

TREASURIES-U.S. yields near flat as Fed's Powell sticks to upbeat script

    * U.S. housing starts plunge to nine-month low in June 
    * Fed's Beige Book flags business worries about tariffs
    * U.S. yield curve holds at flattest in over a decade
    * U.S. two-year yield holds below near decade-high peak

 (Updates with Fed's Beige Book in paragraph 8)
    By Richard Leong
    NEW YORK, July 18 (Reuters) - U.S. Treasury yields were
little changed on Wednesday with the yield curve remaining near
its flattest in nearly 11 years as  Federal Reserve Chairman
Jerome Powell stayed on message about a healthy economy before a
U.S. House of Representatives committee.
    Powell's appearance was the second half of his semiannual
testimony before Congress. 
    "He's been constructive on the economy and downplayed the
risk of a recession," said Jonathan Cohn, interest rate
strategist with Credit Suisse in New York.
    Powell's answers to questions from members of the House
Financial Services Committee struck a chord similar to the one
he sounded before the Senate Banking Committee on Tuesday. His
message supported traders' expectations that the U.S. central
bank would increase key overnight borrowing costs two more times
in 2018.
    The futures market implied traders saw a 63 percent chance
the Fed would increase its target range on key interest rates
twice more this year, CME Group's FedWatch program
showed. 
    Powell acknowledged the risk from the trade friction between
the United States and its major trade partners. 
    "If this process leads to a world of higher tariffs on a
wide range of goods and services that are traded and those are
sustained for a longer period of time, if it results in a more
protectionist world, that would be bad for our economy," he
said.
    After Powell's testimony, the Fed released its latest Beige
Book which showed the economy was growing at a moderate to
modest pace in June to early July even as manufacturers
expressed concerns about the impact of tariffs.
    The possibility of further rate increases pinned the
two-year yield near its highest since August 2008. It
was last 2.611 percent, down 0.4 basis point from late on
Tuesday.
    The spread between two-year and 10-year Treasury yields
 was 25.80 basis points after touching 23.40
earlier Wednesday, its tightest since July 2007.
    Analysts and traders are worried about the yield curve
inverting - when shorter-dated yields are higher than
longer-dated ones. That is seen as a reliable sign of a U.S.
recession, although Powell downplayed the flattening yield curve
as an omen of slower growth.
    The yield on the benchmark 10-year Treasury note
was up nearly 1 basis point on the day at 2.871 percent.
    Treasury yields hit session lows earlier, following a
government report showing that domestic housing starts fell to a
nine-month low in June on rising costs and land shortage.
July 18 Wednesday 2:41PM New York / 1841 GMT
                               Price                  
 US T BONDS SEP8               144-25/32    -8/32     
 10YR TNotes SEP8              120-20/256   -2/32     
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.965        2.0022    -0.016
 Six-month bills               2.115        2.1676    -0.018
 Two-year note                 99-202/256   2.6113    -0.004
 Three-year note               99-210/256   2.6879    0.000
 Five-year note                99-90/256    2.7659    0.004
 Seven-year note               99-120/256   2.8346    0.004
 10-year note                  100-8/256    2.871     0.009
 30-year bond                  102-188/256  2.9857    0.016
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       25.80        1.70      
 30-year vs 5-year yield       21.90        1.40      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        22.50         0.75    
 spread                                               
 U.S. 3-year dollar swap        20.00         0.25    
 spread                                               
 U.S. 5-year dollar swap        14.00         0.25    
 spread                                               
 U.S. 10-year dollar swap        6.50         0.25    
 spread                                               
 U.S. 30-year dollar swap       -4.75         0.00    
 spread                                               
 
    
 (Reporting by Richard Leong; Editing by Steve Orlofsky and
James Dalgleish)
  
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