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TREASURIES-U.S. bond yields retreat from 4-month highs
October 17, 2016 / 2:17 PM / in a year

TREASURIES-U.S. bond yields retreat from 4-month highs

* U.S. yield curve flattens from widest level in a month
    * N.Y. Fed business index falls unexpectedly in October
    * Traders await speech from Fed Vice Chair Fischer
    * Companies plan to sell $25 bln in bonds this week - IFR

    By Richard Leong
    NEW YORK, Oct 17 (Reuters) - U.S. Treasury yields fell on
Monday, pulling back from four-month highs, as bargain-minded
investors bought bonds whose prices had fallen after Federal
Reserve Chair Janet Yellen said last week the central bank may
tolerate inflation above its 2-percent goal.
    A surprise drop in a New York Federal Reserve gauge on
regional business activity in October also supported demand for
bonds by undercutting investor confidence in the U.S. economy.
    "People see decent value at these levels," said Sharon
Stark, fixed-income strategist at Incapital LLC in Boca Raton,
    Benchmark 10-year Treasury notes were up 3/32 in price for a
yield of 1.782 percent, down 1 basis point from late Friday. It
reached 1.814 percent earlier Monday, which was the highest
since June 2, according to Reuters data.
    Yellen said on Friday the question was whether the damage
following the financial crisis of 2008-2009 could be undone "by
temporarily running a 'high-pressure economy,' with robust
aggregate demand and a tight labor market." 
    Some traders interpreted her remarks as suggesting the
central bank may consider allowing inflation to run above the
Fed's 2.0 percent target. They sold more longer-dated Treasuries
than short-term ones in reaction to Yellen's comments, pushing
their spreads to their widest in about a month.
    The yield spread between five-year and 30-year Treasuries
reached 129 basis points earlier Monday before retreating to 127
basis points, which was a tad tighter than Friday. 
    Meanwhile, the decline in Treasury yields was mitigated by a
strong supply of corporate bonds with an expected $25 billion of
investment-grade issues to hit this week, according to IFR, a
unit of Thomson Reuters. 
    While economic data has been mixed, traders reckoned the Fed
remained on track for a possible rate increase at its Dec. 13-14
policy meeting.
    "The chance for a rate hike in December is pretty high,"
Stark said.
    U.S. interest rates futures implied traders saw nearly a 70
percent chance of a rate hike in December, little changed from
late Friday, according to CME Group's FedWatch program. 
    Looking ahead, traders are awaiting possible clues on the
timing of a Fed rate hike from Fed Vice Chair Stanley Fischer
who will be delivering a speech in New York at 12:15 p.m. (1615
  October 17 Monday 9:57AM New York / 1357 GMT
 US T BONDS DEC6               163-28/32    0-21/32   
 10YR TNotes DEC6              130-20/256   0-56/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.3          0.3044    0.000
 Six-month bills               0.4425       0.4496    -0.002
 Two-year note                 99-222/256   0.8187    -0.020
 Three-year note               100-16/256   0.9787    -0.021
 Five-year note                99-90/256    1.2605    -0.021
 Seven-year note               98-200/256   1.5607    -0.026
 10-year note                  97-140/256   1.773     -0.019
 30-year bond                  94-48/256    2.5286    -0.026
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        22.75        -0.25    
 U.S. 3-year dollar swap        14.00         0.00    
 U.S. 5-year dollar swap         1.00         0.00    
 U.S. 10-year dollar swap      -17.50        -0.50    
 U.S. 30-year dollar swap      -56.75        -0.25    

 (Reporting by Richard Leong; Editing by Bernadette Baum)

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