February 27, 2018 / 8:47 PM / 3 months ago

TREASURIES-Powell's upbeat economic view flattens U.S. yield curve

    * Powell sees U.S. economy strengthening since December
    * Powell downplays risk signaled by a flattening yield curve
    * Powell sticks to Fed's gradual rate-hike stance
    * U.S. durable goods fall again, consumer mood hits 17-year
high

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Feb 27 (Reuters) - The margin between U.S.
shorter- and longer-dated yields narrowed on Tuesday after
Federal Reserve Chairman Jerome Powell said data since December
pointed to a strengthening economy and his confidence had
increased that inflation will rise.
    His outlook spooked traders who now fear the U.S. central
bank might raise key short-term borrowing costs four times in
2018, one more rate increase than they had previously thought.
    A faster path of Fed rate hikes will likely keep a lid on
longer-dated yields.
    Powell expressed his view during the question-and-answer
section of his first semi-annual economic testimony as Fed chief
before the House Financial Services Committee.
    "The view is that he reinforced the view of a March rate
hike and added to expectations for a higher number of rate hikes
going forward," said John Canavan, market strategist at Stone &
McCarthy Research Associates in New York.
    Futures market implied traders have almost priced in the
chances of the Fed's next rate increase at its March 20-21
meeting.
    Before Powell's Q&A, Treasury yields were lower on his
prepared remarks for his House appearance, which suggested no
departure from the Fed's current stance set by his predecessors,
Janet Yellen and Ben Bernanke, analysts said.
    "The (Federal Open Market Committee) will continue to strike
a balance between avoiding an overheating economy and bringing
... price inflation to 2 percent on a sustained basis," Powell
said in prepared remarks.
    Powell will complete his semiannual testimony before the
Senate Banking Committee on Thursday.
    The benchmark 10-year Treasury yield was 2.901
percent, up 4 basis points from late on Monday, while the
two-year yield was 2.266 percent, over 3 basis points
on the day.
    The rise in longer-dated yields was capped by safe-haven
bids stemming from a sell-off on Wall Street as Powell's
economic outlook stoked rate-hike worries.
    The spread between five-year and 30-year Treasury yields
contracted by 3 basis points to 51 basis points.
It remained above the decade low of 40 basis points reached on
Feb. 1, Tradeweb data showed.
    Some analysts have been concerned the yield curve may
eventually invert where shorter-dated yields are higher than
longer-dated ones, which has often preceded previous U.S.
recessions. 
    In his House testimony, Powell, when asked, downplayed 
concerns about a curve inversion.
    "I don't look at the current yield curve situation as a
problem," he said. 
    On the data front, domestic durable goods orders fell 3.7
percent in January, more than what analysts had forecast.
    On the other hand, the Conference Board's gauge on U.S.
consumer confidence rose more than expected in February to its
strongest level since November 2000.
February 27 Tuesday 3:19PM New York / 2019 GMT
                               Price                  
 US T BONDS MAR8               143-21/32    -18/32    
 10YR TNotes MAR8              120-108/256  -13/32    
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.645        1.6749    -0.002
 Six-month bills               1.83         1.8727    -0.002
 Two-year note                 99-248/256   2.266     0.036
 Three-year note               99-128/256   2.4257    0.050
 Five-year note                99-208/256   2.6653    0.060
 Seven-year note               99-120/256   2.8342    0.057
 10-year note                  98-176/256   2.9026    0.044
 30-year bond                  96-184/256   3.1704    0.016
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       63.50        -0.10     
 30-year vs 5-year yield       50.50        -3.70     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        27.75         0.75    
 spread                                               
 U.S. 3-year dollar swap        24.25         0.25    
 spread                                               
 U.S. 5-year dollar swap        11.50         0.50    
 spread                                               
 U.S. 10-year dollar swap        1.25         1.25    
 spread                                               
 U.S. 30-year dollar swap      -18.50         1.75    
 spread                                               
 

    
 (Reporting by Richard Leong; Editing by Jonathan Oatis and
Susan Thomas)
  
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