May 24, 2017 / 8:14 PM / 2 years ago

TREASURIES-U.S. bond yields fall as Fed hints slow stimulus removal

    * Bond market breaks out of recent tight-range trading
    * U.S. 5-year note sale fetches solid investor demand
    * U.S. Treasury to sell $28 bln 7-year notes Thursday

 (Updates throughout, adds quote)
    By Richard Leong
    NEW YORK, May 24 (Reuters) - U.S. Treasury yields fell on
Wednesday on investor relief after the Federal Reserve signaled
a gradual approach on raising interest rates and winding down of
its massive $4.5 trillion worth bond holdings.
    The bond market broke out of its listless trading of the
previous two days as markets received a bit more clarity on the
central bank's intention to remove more monetary stimulus
following a recent string of mixed economic data.
    "Even though the Fed is reducing stimulus, I think this
gives the market some comfort," said Matt Toms, chief investment
officer of fixed income at Voya Investment Management in
    Benchmark 10-year Treasury note yield fell more
than 2 basis points at 2.257 percent, while 30-year bond yield
 declined 2 basis points to 2.294 percent.
    Two-year yield, which is sensitive to traders'
view on Fed policy, fell to over 2 basis points at 1.298
    The yield gap between two-year and 10-year Treasuries shrank
over 1 basis point to 96 basis points, which was not far above
the level last seen on Oct. 27. This implied traders did not
expect less bond purchases from the Fed would push up
longer-dated yields.
    Still the Fed left the door for further rate increases in
the coming months, despite the growth slowdown in the first
quarter. Traders expect the next hike at its June 13-14 meeting,
according to interest rates futures. 
    "Members generally judged that it would be prudent to await
additional evidence indicating that a recent slowdown in the
pace of economic activity had been transitory before taking
another step in removing accommodation," according to the latest
 Fed minutes. 
    Prior to the Fed minutes, bond yields were pinned down by
demand for low-risk assets in the wake of Moody's downgrade of
China and the deadly suicide bombing in Manchester, England.

    Solid demand at a $34 billion sale of a new five-year
Treasury notes, which was part of this week's $88 billion
coupon-bearing Treasury supply, also held down yields.
    The U.S. Treasury will end this week's auctions with a $28
billion sale of seven-year debt on Thursday.
    In addition to Treasuries, investors were making room for a
hefty supply of corporate bonds, which has put upward pressure
on yields this week.
    The U.S. bond market will close early at 2 p.m. (1800 GMT)
on Friday and will be shut on Monday for the U.S. Memorial Day
May 24 Wednesday 3:46PM New York / 1946 GMT
 US T BONDS JUN7               153-22/32    0-13/32   
 10YR TNotes JUN7              126-32/256   0-68/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.9175       0.9324    -0.005
 Six-month bills               1.0525       1.0728    -0.005
 Two-year note                 99-234/256   1.2936    -0.025
 Three-year note               100-30/256   1.4595    -0.030
 Five-year note                100-98/256   1.7935    -0.037
 Seven-year note               99-156/256   2.0607    -0.034
 10-year note                  101-8/256    2.2589    -0.024
 30-year bond                  101-96/256   2.9307    -0.014
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        23.25        -0.25    
 U.S. 3-year dollar swap        20.25         0.50    
 U.S. 5-year dollar swap         7.50         0.75    
 U.S. 10-year dollar swap       -6.00         0.25    
 U.S. 30-year dollar swap      -44.50         1.00    

 (Reporting by Richard Leong; Editing by Grant McCool and Andrew
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