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TREASURIES-U.S. yield curve flattens as Fed stays hawkish amid low inflation
June 20, 2017 / 7:00 PM / 6 months ago

TREASURIES-U.S. yield curve flattens as Fed stays hawkish amid low inflation

 (Adds comments from Fed's Evans; Updates prices)
    * Boston Fed's Rosengren: Low rates risk to financial
    * U.S. 5-, 30-year yield curve flattest since 2007
    * Chicago Fed's Evans concerned about soft inflation

    By Karen Brettell
    NEW YORK, June 20 (Reuters) - The U.S. Treasury yield curve
flattened to its lowest levels since December 2007 as more
hawkish Federal Reserve officials led intermediate-dated notes
to underperform long-term bonds, which are being supported by
falling inflation.
    Boston Fed President Eric Rosengren said on Tuesday that the
era of low interest rates in the United States and elsewhere
poses financial stability risks and that central bankers must
factor such concerns into their decision-making.             
    On Monday, New York Fed President William Dudley said
halting the rate-hiking cycle now would imperil the economy, and
unemployment at 4.3 percent now and inflation at 1.5 percent
were "a pretty good place to be.”             
    “The more the Fed beats in this relentlessly hawkish
message, the more the yield curve just ends up flattening on
it,” said Aaron Kohli, an interest rate strategist at BMO
Capital Markets in New York.
    The yield curve between five-year notes and 30-year bonds
               flattened to 96 basis points on Tuesday, the
lowest since December 2007.
    The yield curve has flattened as the Fed’s hawkishness
contrasts with weakening inflation.
    Data last Wednesday showed that the so-called core Consumer
Price Index (CPI), which strips out food and energy costs,
increased 1.7 percent year-on-year in May, the smallest rise
since May 2015.             
    That measure has fallen from a year-on-year rise of 2.2
percent in February.             
    “The Fed has been talking much more hawkishly than the past
in the context of the recent data,” said Kohli. “It’s not that
the levels are disturbing, it’s that the trend is really
    Chicago Fed President Charles Evans said on Tuesday that he
is increasingly concerned about a recent softness in inflation
and whether price pressures will reach the U.S. central bank's 2
percent objective.             
    Five-year note yields           , which are among the most
sensitive to Fed policy, have jumped to 1.76 percent from a
six-month low of 1.67 percent on Wednesday, before the U.S.
central bank raised interest rates for the second time in three
    Thirty-year bond yields            , which are most
influenced by inflation expectations, by contrast have tumbled
to 2.74 percent from 2.80 percent after the Fed’s rate hike last
    Benchmark 10-year notes             were last up 8/32 in
price to yield 2.16 percent, down from 2.19 percent late on

 (Editing by Chizu Nomiyama)

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