TREASURIES-U.S. yields rise on GDP data, BoJ inflation comments

 (Updates data, quotes, chart)
    * U.S. Q4 2017 GDP grew 2.6 percent, below forecasts
    * Two-year note yield hits nine-year high
    * Bank of Japan governor sees signs of inflation

    By Kate Duguid
    NEW YORK, Jan 26 (Reuters) - U.S. Treasury yields rose
Friday following data showing the nation's economy grew 2.6
percent in the final quarter of 2017 and the governor of the
Bank of Japan said inflation is finally close to reaching its
    Gross domestic product grew slower than the 3 percent
increase forecast among economists polled by Reuters.
Nevertheless, the market response was muted, with benchmark
10-year note yields falling within a basis point,
before paring losses, suggesting investors remained confident in
the underlying health of the economy and the Federal Reserve's
plan to hike interest rates in March. 
    The GDP "number looked like a bit of a disappointment, but
when you strip out trade and inventories you end up with GDP
growth - excluding those two factors - that was well above 4
percent," said Brian Daingerfield, macro strategist at NatWest
Markets in Stamford, Connecticut. 
    The advance estimate of GDP offered insight into the U.S.
economy before President Donald Trump's tax cuts took effect.
Trump has previously cited 3 percent growth as a target rate for
the country. 
    The GDP number "should give Federal Reserve officials some
cover to offer a stronger statement at the January FOMC next
week," said Guy LeBas, chief fixed income strategist at Janney
Montgomery Scott in Philadelphia. 
    Treasury yields also rose in afternoon trading after Bank of
Japan Governor Haruhiko Kuroda said wages and prices were
gradually rising, though there remained a number of factors
preventing the central bank from reaching its 2 percent
inflation target.
    Bond yields and inflation rates move in tandem, as investors
require a higher yield to compensate for inflation risk.
    Kuroda said the central bank would continue its policy of
quantitative easing, citing challenges to the economy posed by
globalization and a "tenacious" deflationary mindset. However,
the Bank of Japan is the second-largest holder of Treasuries in
the world and any suggestion of tightening monetary policy can
spook markets. 
    "Even a modest hint from the Bank of Japan that they’re
turning slightly more constructive on inflation is notable given
how sensitive the market is to the possibility that some of the
world’s most accommodative central banks are starting to change
their mentality on the growth-inflation balance," said
    At 3:26 p.m. (2026 GMT), the yield on 10-year Treasury notes
was 2.660 percent, above Thursday's close at 2.621 percent. The
two-year note yield reached a high of 2.132, its
highest since September 2008.

   Friday, Jan. 26, at 1537 EST (2037 GMT):
 US T BONDS MAR8               148-26/32    -0-19/32   
 10YR TNotes MAR8              122-20/256   -0-92/256  
                               Price        Current    Net
                                            Yield      Change
                                            (pct)      (bps)
 Three-month bills             1.3975       1.4217     -0.005
 Six-month bills               1.6025       1.6377     0.003
 Two-year note                 99-196/256   2.1203     0.036
 Three-year note               99-78/256    2.2439     0.047
 Five-year note                99-142/256   2.4702     0.052
 Seven-year note               99-100/256   2.5958     0.044
 10-year note                  96-128/256   2.6581     0.037
 30-year bond                  96-220/256   2.9082     0.028
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
 U.S. 2-year dollar swap        18.00         0.00     
 U.S. 3-year dollar swap        18.00        -0.50     
 U.S. 5-year dollar swap         6.75        -0.25     
 U.S. 10-year dollar swap        2.00         0.50     
 U.S. 30-year dollar swap      -14.75         1.00     

 (Reporting by Richard Leong and Kate Duguid; Editing by Chizu
Nomiyama and Meredith Mazzilli)