June 26, 2017 / 6:57 PM / 25 days ago

TREASURIES-Long bond yields fall as U.S. economic data disappoints

3 Min Read

 (Adds quote, auction results; updates prices)
    * Weak U.S. capital goods data raises economic concerns
    * Thirty-year bond yields lowest since November
    * Five-year, 30-year yield curve flattest since late 2007
    * Treasury sells $26 bln two-year notes to strong demand

    By Karen Brettell
    NEW YORK, June 26 (Reuters) - Long-dated U.S. Treasury bond
yields dropped to seven-month lows on Monday and the yield curve
between five-year notes and 30-year bonds fell to its flattest
level since 2007 after weak U.S. economic data raised concerns
about tepid growth and falling inflation.
    New orders for key U.S.-made capital goods unexpectedly fell
in May and shipments also declined, suggesting a loss of
momentum in the manufacturing sector halfway through the second
quarter.             
    "The economic data has not been that great," said Justin
Lederer, an interest rate strategist at Cantor Fitzgerald in New
York. At the same time, "people are looking for yield and the
front-end is anchored."
    Thirty-year bond yields             slipped to 2.68 percent,
the lowest since Nov. 9.
    The difference in yield between five-year notes and 30-year
bonds                narrowed to as little as 93 basis points,
producing the flattest yield curve since late 2007.
    The yield curve has flattened in the past month as Federal
Reserve officials including New York Fed President William
Dudley indicated that further monetary policy tightening is
likely.
    That has led short- and intermediate-dated debt, which is
more sensitive to interest rate changes, to underperform while
long bonds have been supported by concerns about tepid growth
and falling inflation.
    "Inflation is the key," said Thomas Simons, a senior money
market economist at Jefferies in New York. "Until oil moves
meaningfully higher and people start to get convinced that
inflation is going to come back, this curve flattening is going
to continue."
    Financial conditions have loosened in the past year despite
the Fed raising interest rates three times since December, which
is another reason to continue tightening, Dudley said in remarks
published on Monday.             
    San Francisco Fed President John Williams said on Monday
that a recent slowdown in U.S. inflation was mainly due to
one-off factors and should not prevent further increases in
rates.             
    Fed Chair Janet Yellen is scheduled to speak on Tuesday.
    The Treasury sold $26 billion in two-year notes to strong
demand on Monday, the first auction of $88 billion in new
coupon-bearing debt supply this week.
    The ratio of bids to the amount of two-year notes offered
             was 3.03, which the strongest since November 2015.
            
    The notes sold at a high yield of 1.348 percent, which was
the highest yield since October 2008.             
    The government will also sell $34 billion in five-year notes
on Tuesday and $28 billion in seven-year notes on Wednesday.

 (Editing by Meredith Mazzilli and Richard Chang)
  
 
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