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TREASURIES-Yield curve flattest in six years as rate hike expectations rise
December 8, 2014 / 9:48 PM / 3 years ago

TREASURIES-Yield curve flattest in six years as rate hike expectations rise

(Recasts with yield curve, adds quote, updates prices)
    * Five-year, 30-year yield curve flattest in six years
    * Three-year note yields at 3-mth highs before auction

    By Karen Brettell
    NEW YORK, Dec 8 (Reuters) - The U.S. Treasuries yield curve
flattened to a six-year low on Monday after a surprisingly
strong November employment report boosted expectations of an
interest rate increase next year.
    U.S. employers added the largest number of workers in almost
three years last month and wage gains accelerated, a sign of
economic strength that could draw the Federal Reserve closer to
raising rates. 
    Short and intermediate-date notes are the most sensitive to
a rate increase and dramatically underperformed on Monday, while
30-year bonds rallied strongly.
    "It's basically just follow through from Friday's number,
the curve is seeing massive flattening," said Kri Bayha, a
front-end Treasuries trader at Societe Generale in New York.
    Two-year interest rate futures were the worst performer on
the day, even underperforming two-year Treasuries, as investors
preferred to sell futures to avoid any disruptions that may
arise in the reverse repurchase agreement market heading into
year-end, Bayha added.
    Two-year notes last yielded 0.64 percent, down
from three-and-a-half year highs of 0.68 percent reached in
overnight trading. Three-year notes yielded 1.06
percent, down from three-month highs of 1.11 percent overnight.
Five-year notes yielded 1.67 percent, down from a
two-month high of 1.73 percent overnight.
     The yield spread between five-year notes and 30-year bonds
 flattened to six-year lows of 124 basis points,
down from 142 basis points last Monday.
    Higher short-dated yields may help the government sell $25
billion in three-year notes on Tuesday, the first sale of $59
billion in new debt this week.
    The Treasury will also sell $21 billion in 10-year notes on
Wednesday and $13 billion in 30-year bonds on Thursday.
    Concerns about slowing global growth also added a bid to
longer-dated U.S. debt, trumping improving momentum in the U.S.
    "The market is struggling with the global growth story and
the U.S. story," said Gennadiy Goldberg, an interest rate
strategist at TD Securities in New York.
    China's exports rose at a slower-than-expected pace and
imports dropped 6.7 percent in November, while Japan's economy
shrank more than expected in the third quarter. 
    Ewald Nowotny, a member of the European Central Bank's
Governing Council, said on Monday that the euro zone's economy
is weakening "massively" and that he expected inflation to slow
early next year. 

 (Editing by Chizu Nomiyama and Alan Crosby)

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