September 21, 2017 / 1:45 PM / 10 months ago

TREASURIES-Yield curve flattest since July on possible December rate hike

    * Fed seen as more hawkish than market anticipated
    * Philly Fed manufacturing index increases

    By Karen Brettell
    NEW YORK, Sept 21 (Reuters) - The U.S. Treasury yield curve
flattened to two-and-a-half month lows on Thursday as investors
adjusted for the likelihood of  December interest rate increase,
a day after the Federal Reserve struck a more hawkish than
expected tone at its September meeting.
    New economic projections released after the Fed's two-day
policy meeting showed 11 of 16 officials see the "appropriate"
level for the federal funds rate, the central bank's benchmark
interest rate, to be in a range between 1.25 percent and 1.50
percent by the end of 2017, one-quarter of a point above the
current level.             
    "The meeting was definitely more hawkish than what the
market was anticipating," said Mary Ann Hurley, vice president
in fixed income trading at D.A. Davidson in Seattle. 
    "We were definitely not pricing in another rate hike for
this year," Hurley said.
    Some traders and investors had expected the Fed to strike a
more dovish tone given the potential economic impact of recent
severe hurricanes and still sluggish inflation.
    The U.S. central bank was also seen as potentially slowing
its rate hike path to give the market time to absorb reductions
in its balance sheet.
    The Treasury yield curve between five-year notes and 30-year
bonds                flattened to 92 basis points on Thursday,
the lowest level since July 6.
    Intermediate-dated debt underperformed on the Fed statement
as it is more sensitive than longer dated bonds to interest rate
    Benchmark 10-year notes             were last up 5/32 in
price to yield 2.26 percent, up from 2.24 percent before
Wednesday’s Fed statement.
    Yields briefly rose on Thursday after data showed that
manufacturing activity in the mid-Atlantic region accelerated in
September amid a surge in new orders.             

 (Reporting by Karen Brettell; editing by Grant McCool)
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