May 11, 2018 / 3:20 PM / a year ago

TREASURIES-Yield curve flattest since 2007; Fed hikes seen despite soft data

    By Kate Duguid
    NEW YORK, May 11 (Reuters) - The Treasury yield curve on
Friday was the flattest it had been since July 2007 as
shorter-dated yields rose on expectations the Federal Reserve
would hike U.S. interest rates in spite of weaker-than-expected
economic data this week. 
    The spread between the five-year and 30-year bond yields
 reached a session low of 26.2 basis points, its
narrowest since before the financial crisis in 2007. The spread
between two- and 10-year note yields bottomed out
at 41.0 basis points, the lowest since September 2007.
    Yields on shorter-dated notes have been rising faster than
those on longer-dated bonds. The short end of the curve, and the
two-year yield in particular, reflects traders'
expectations that the Fed will raise interest rates. The long
end, notably the 10-year yield indicates market
sentiment about the future health of the economy. 
    The yield on the 10-year benchmark government bond fell on
Thursday as a smaller-than-expected increase in the consumer
price index in April reduced fears that domestic inflation is
picking up steam as the labor market tightens.
    "The data yesterday did not do any favors for the bearish
camp, given how low core CPI was," said Ian Lyngen, head of U.S.
rates strategy at BMO Capital Markets in New York. Bond bears
bet rising inflation and other economic and technical factors
will prompt investors to sell Treasuries, lowering prices and
lifting yields.
    But core inflation remains low because wages have not risen
substantially even with jobless claims near a 48-year low. Real
average hourly earnings were flat in April, and rose just 0.2
percent year over year, the Labor Department reported on
    The 10-year yield on Friday rose to a session high of 2.980
percent, still below the 3 percent level it broke above on
Wednesday. The two-year yield hit a weekly high of 2.543 percent
on both Thursday and Friday.
    Trader expectations that the Fed will raise rates in June is
100 percent, according to CME Group's FedWatch Tool. For a rate
hike in September, the current probability is 73.6 percent,
while the market remains divided over whether the Fed will make
a fourth rate hike at the December meeting.   
    May 11 Friday 11:01AM New York / 1501 GMT
 US T BONDS JUN8               143          -0-6/32   
 10YR TNotes JUN8              119-84/256   -0-16/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.865        1.8995    0.010
 Six-month bills               2.005        2.0532    0.002
 Two-year note                 99-174/256   2.5431    0.005
 Three-year note               99-202/256   2.6987    0.009
 Five-year note                99-146/256   2.8433    0.010
 Seven-year note               99-140/256   2.9473    0.007
 10-year note                  99-24/256    2.9805    0.010
 30-year bond                  100-36/256   3.1178    -0.003
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        22.25        -2.25    
 U.S. 3-year dollar swap        16.75        -1.75    
 U.S. 5-year dollar swap         9.75        -1.25    
 U.S. 10-year dollar swap        3.50        -1.00    
 U.S. 30-year dollar swap       -8.75        -0.25    
 (Reporting by Kate Duguid; Editing by David Gregorio)
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