September 29, 2017 / 7:16 PM / a year ago

TREASURIES-U.S. bond yields ends choppy quarter slightly higher

    * Reports on Trump, Warsh meeting raise bets on more hawkish
    * U.S. Midwest factory activity shows resilience, inflation
    * Treasuries set to eke out 0.06 percent return in third

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Sept 29 (Reuters) - Most U.S. Treasury yields
edged higher on Friday, marking the end of a choppy third
quarter, as investors weighed the chances on the Federal Reserve
raising interest rates in December and Washington's
implementation of tax cuts and other fiscal changes.
    Bond yields rose modestly on encouraging data about steady
economic growth and reports U.S. President Donald Trump met with
former Federal Reserve Governor Kevin Warsh about a potential
nomination to head the U.S. central bank.
    In light of his views on rates and past stance against
expansion of the Fed's balance sheet, Warsh is seen as more
hawkish than current Fed Chair Janet Yellen, whose term expires
in February, analysts said.
    "He has the make-up to be more hawkish, but you don't know
until he gets the job," said Jim Caron, portfolio manager at
Morgan Stanley Investment Management in New York.
    Consumer spending nudged up 0.1 percent in August but a
gauge of U.S. Midwest factory activity unexpectedly rose in
September despite disruptions stemming from hurricanes Harvey
and Irma.
    Friday's data did not change traders' expectations, at about
73 percent, that the Fed would raise short-term rates again in
    Longer-dated yields were supported by a deceleration in a
measure of the core rate of personal consumption expenditure,
the Fed's preferred inflation gauge. The annual rise in core PCE
slowed to 1.3 percent in August, the weakest reading since
November 2015.
    The benchmark 10-year U.S. Treasury note yield
was up 2 basis points at 2.325 percent, while the 30-year yield
 was down 0.9 basis point at 2.859 percent.
    The two-year yield was up over 2 basis points at
1.479 percent, not too far from the near nine-year peak it
reached this week.
    For the month, Treasury yields were on track to post their
biggest monthly increase since November during a global market
sell-off following Trump's surprise presidential victory.
    Due to the sharp rise in yields this month, Treasuries
recorded a slim return of 0.06 percent for the third quarter,
bringing their year-to-date gain to 2.31 percent, according to
an index compiled by Barclays and Bloomberg.
    The $14 trillion sector has experienced a choppy quarter.
Bond yields fell in July and August on soft economic data and
anxiety about tensions between North Korea and the United States
over Pyongyang's missiles and nuclear weapons programs.
    They turned higher in September, with the 10-year yield
hitting an 11-week high this week on hints the Fed may raise
rates in December and Trump's roll-out of a tax plan that raised
concerns it may increase the federal deficit and borrowing.

  September 29 Friday 3:07PM New York / 1907 GMT
 US T BONDS DEC7               152-26/32    0-1/32    
 10YR TNotes DEC7              125-80/256   -0-60/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.04         1.0571    0.000
 Six-month bills               1.1725       1.1957    0.003
 Two-year note                 99-204/256   1.4787    0.024
 Three-year note               99-80/256    1.6143    0.036
 Five-year note                99-196/256   1.9244    0.029
 Seven-year note               99-196/256   2.1613    0.026
 10-year note                  99-92/256    2.3229    0.016
 30-year bond                  97-220/256   2.8569    -0.011
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        25.00         0.25    
 U.S. 3-year dollar swap        22.75        -0.75    
 U.S. 5-year dollar swap         7.50         0.00    
 U.S. 10-year dollar swap       -4.75        -0.50    
 U.S. 30-year dollar swap      -33.25         0.00    
 (Reporting by Richard Leong; Editing by Chizu Nomiyama and
James Dalgleish)
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