February 28, 2017 / 11:18 PM / 6 months ago

TREASURIES-U.S. yield curve flattens ahead of Trump speech

    * U.S. Treasuries produce biggest monthly gain since June
    * Investors await details on fiscal stimulus from Trump
speech
    * Traders raise view on Fed increasing U.S. rates in March
    * U.S. Q4 GDP holds at 1.9 pct, falling short of forecast

 (Update market action, add quote)
    By Richard Leong and Sam Forgione
    NEW YORK, Feb 28 (Reuters) - Longer-dated U.S. Treasury
yields fell on Tuesday on month-end buying and shorter-dated
yields rose on bets the Federal Reserve migh raise interest
rates as soon as March, causing a part of the yield curve to hit
its flattest level since November.
    The Treasuries sector was on track in February to post its
biggest monthly total return since June, according to an index
compiled by Bloomberg and Barclays.
    Investors awaited possible details on tax cuts, reduced
regulation and infrastructure spending from U.S. President
Donald Trump who was scheduled to speak before a joint session
of Congress at at 9 p.m. (0200 GMT Wednesday).
    Treasury yields have retreated since mid-December when
benchmark yields reached their highest in over two years on
expectations of swift implementation of fiscal measures pledged
by Trump during his campaign last year.
    Details on these programs, which investors had bet on to
cause a surge in federal debt and domestic inflation, have been
scarce. Some of them hoped Trump's upcoming speech will offer
specifics on his perceived pro-growth economic agenda.
    "The bond market is waiting and looking at the uncertainty
that things may take longer-than-expected," said Andrew Richman,
director of fixed income at SunTrust Advisory Services in
Jupiter, Florida.
    The benchmark 10-year Treasury yield was
marginally lower in late trading at 2.365 percent, while the
30-year yield was down nearly 2 basis points at
2.967 percent.
    In contrast two-year yield, which is most
sensitive to traders' view on Fed policy, was up over 3 basis
points at 1.236 percent.
    The spread between two-year and 10-year yields shrank to 112
basis points, its tightest level since November.
    A number of Fed officials have said the U.S. central bank is
considering raising interest rates soon as the economy
approaches full employment and its 2 percent inflation goal.
    San Francisco Fed President John Williams said a rate hike
at the Fed's March 14-15 meeting is up for "serious
consideration," while Philadelphia Fed chief Patrick Harker said
he was clinging to his outlook for three rate increases in 2017.

    Interest rates futures implied traders saw about a 37
percent chance on a March rate hike. The over-the-counter
swap market suggested traders assigned a 60
percent probability for a such a move.
    Some analysts remained skeptical of a rate increase in two
weeks as economic data depicted only a modest pace of expansion
that doesn't require a faster pace of rate hikes.
    Earlier Tuesday, the Commerce Department left its
fourth-quarter reading on the gross domestic product at 1.9
percent, falling short of analyst forecast.
February 28 Tuesday 4:03PM New York / 2103 GMT
                               Price                  
 US T BONDS MAR7               152-31/32    0-11/32   
 10YR TNotes MAR7              125          -0-36/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.555        0.5635    0.035
 Six-month bills               0.7125       0.725     0.033
 Two-year note                 99-200/256   1.2362    0.032
 Three-year note               99-168/256   1.494     0.035
 Five-year note                99-224/256   1.9013    0.033
 Seven-year note               99-138/256   2.1964    0.013
 10-year note                  98-252/256   2.365     -0.002
 30-year bond                  100-160/256  2.9683    -0.017
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        35.00        -0.75    
 spread                                               
 U.S. 3-year dollar swap        27.75        -1.25    
 spread                                               
 U.S. 5-year dollar swap        11.50        -0.75    
 spread                                               
 U.S. 10-year dollar swap       -2.50         0.00    
 spread                                               
 U.S. 30-year dollar swap      -38.00         0.25    
 spread                                               
 
    

    
 (Additional reporting by Sam Forgione; Editing by Frances Kerry
and Chizu Nomiyama)
  

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