June 13, 2018 / 1:56 PM / in 10 days

TREASURIES-U.S. yields slightly up ahead of Fed rate decision

    By Gertrude Chavez-Dreyfuss
    NEW YORK, June 13 (Reuters) - U.S. Treasury yields were
slightly higher overall on Wednesday, moving in narrow ranges,
ahead of a widely-expected interest rate hike by the Federal
Reserve.
    U.S. 30-year yields, which move inversely with prices,
however, were modestly lower on the day, as the yield curve
continued to flatten in the run-up to the Fed decision.
    The yield spread between U.S. 30-year bonds and U.S. 5-year
notes narrowed to a low of 26.4 basis points, the
flattest level in four weeks. 
    Another yield curve measure showed that the gap between U.S.
10-year and U.S. two-year note yields compressed to 39.8 basis
points, the tightest since at least March 2010, according to
Reuters data.
    A flat yield curve suggested expectations of U.S. interest
rate increases that have boosted the short end.
    Higher-than-expected U.S. producer prices in May had little
impact on the Treasury market, and if anything, further extended
the flattening of the yield curve, said Ian Lyngen, head of U.S.
rates strategy at BMO Capital Markets in New York.
    Data showed on Wednesday that U.S. producer prices increased
more than expected in May, leading to the biggest annual gain in
nearly 6-1/2 years, but underlying producer inflation remained
moderate. The PPI index rose 0.5 percent last month, boosted by
a surge in gasoline prices, from a 0.1 percent gain in April.

    "It's FOMC day, so we're not surprised to see that the
inflation data hasn't been a huge driver of price action in the
Treasury market -- after all, it is only PPI," said Lyngen. 
    "The PPI story has always struck us as more one about
corporate profit compression than true inflation pass-through,
at least in the current environment. As we've noted in the past,
the curve flattening trade begins and ends with the Fed," he
added.
    With the Federal Reserve virtually guaranteed to raise
interest rates at its two-day meeting this week, investors are
focused on how the U.S. central bank characterizes its monetary
policy as borrowing costs return to more normal levels amid an
ongoing economic expansion.
    In mid-morning trading, U.S. 10-year yields edged up to
2.959 percent, from Tuesday's 2.957 percent.
    U.S. 30-year yields, however, slipped to 3.084 percent
, compared with 3.092 late Tuesday.
    On the short end of the curve, U.S. two-year yields rose to
three-week highs of 2.561 percent, from 2.541 percent
on Tuesday. They were last at 2.549 percent.
    
      June 13 Wednesday 9:46AM New York / 1346 GMT
                               Price                  
 US T BONDS SEP8               143          0-3/32    
 10YR TNotes SEP8              119-96/256   -0-8/256  
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.895        1.9306    -0.002
 Six-month bills               2.04         2.0899    -0.002
 Two-year note                 99-232/256   2.549     0.008
 Three-year note               99-218/256   2.6768    0.006
 Five-year note                99-178/256   2.8161    0.008
 Seven-year note               99-192/256   2.9148    0.005
 10-year note                  99-72/256    2.959     0.002
 30-year bond                  100-196/256  3.0855    -0.007
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        26.75         0.25    
 spread                                               
 U.S. 3-year dollar swap        22.25         0.50    
 spread                                               
 U.S. 5-year dollar swap        14.00         0.00    
 spread                                               
 U.S. 10-year dollar swap        6.00         0.00    
 spread                                               
 U.S. 30-year dollar swap       -6.25        -0.25    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Nick Zieminski)
  
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