February 27, 2018 / 5:52 PM / 3 months ago

TREASURIES-Powell's upbeat outlook on economy flattens U.S. yield curve

* Powell sees U.S. economy strengthening since December

* Powell sticks to Fed’s gradual rate-hike stance

* U.S. durable good orders disappoint in January

* U.S. consumer confidence jumps to 17-year peak (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 that since December data 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.

“His reply mentioned focus on fundamentals, inflation in particular, and how they have evolved and the market is taking that as increasing the probability of seeing a fourth dot for 2018 in the March summary of economic projections,” said Bruno Braizinha, interest rate strategist at SG Corporate & Investment Banking in New York.

Braizinha was referring to the set of forecasts from Fed policy makers to be released after their March 20-21 meeting.

Before Powell’s Q&A, Treasury yields were lower on Powell’s 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.

At 12:17 a.m. (1717 GMT), the benchmark 10-year Treasury yield was 2.921 percent, up 6 basis points from late on Monday, while the two-year yield was 2.274 percent, up 4 basis points on the day.

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.

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 Nov. 2000.

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

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