August 27, 2018 / 3:10 PM / in 8 months

TREASURIES-U.S. bond yields rise ahead of 2-year auction

 (New throughout, updates prices, market acitvity, adds yield
    * U.S. to sell $36 bln 2-year fixed-rate notes at 1 p.m. 
    * U.S. yield curve hovers near flattest since 2007
    * Speculative net 10-year T-note net shorts hit record high

    By Richard Leong and Kate Duguid
    NEW YORK, Aug 27 (Reuters) - U.S. Treasury yields rose on
Monday as investors and dealers made room for $36 billion of
two-year note supply, the first part of this week's $104 billion
coupon-bearing government debt offerings.
    Expectations that Mexico and the United States were nearing
a deal on bilateral issues in renegotiation of the North
American Free Trade Agreement (NAFTA) also stoked some selling
of safe-haven Treasuries holdings, analysts said.
    Conflicts between Washington and major U.S. trade partners
had some investors betting that global growth could slow in the
second half while the Federal Reserve might pause U.S. rate
    "You've been seeing a re-reversal of what's been going on in
the past few weeks. Some of the optimism around trade and its
potential impact on economic growth has led to investors being
more optimistic around interest rates going up," said Jim
Barnes, director of fixed income at Bryn Mawr Trust in Devon,
    At 10:52 a.m. (1436 GMT), the yield on two-year Treasuries
 was up 1 basis point at 2.641 percent. The 10-year
yield was also 1 basis point higher at 2.837
    The spread between two-year and 10-year yields
 hovered at its tightest since 2007 after remarks
last Friday from Federal Reserve Chairman Jerome Powell
reinforced expectations that the U.S. central bank will
gradually increase overnight borrowing costs.
    Interest rates futures implied traders expected the Fed
would hike interest rates at least one more time this year.
    Traders priced in a 96 percent the Fed would increase
short-term rates a quarter point to 2.00-2.25 percent at its
Sept. 25-26 policy meeting, CME Group's FedWatch program showed.
    They suggested traders estimated a 68 percent likelihood of
another quarter-point hike at its December meeting.
    The two-year yield, which is sensitive to traders' view on
Fed policy, is not far below its decade high of 2.690 percent
set in July. 
    The pickup in short-term yields has appealed to investors
seeking decent return with relatively low risk, analysts said. 
    In "when-issued" activity, traders expected the upcoming
two-year supply to sell at a yield of 2.6480
percent at 1 p.m. (1700 GMT), slightly below the yield at the
prior two-year auction in July, Tradeweb data showed.
    While bond fund managers remained bullish on longer-dated
Treasuries, speculators including hedge funds raised net shorts
on 10-year Treasury futures last week, according to data from
the Commodity Futures Trading Commission released late Friday.

August 27 Monday 10:54AM New York / 1454 GMT
 US T BONDS SEP8               145-11/32    -8/32     
 10YR TNotes SEP8              120-112/256  -3/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.07         2.1093    0.015
 Six-month bills               2.195        2.2498    0.008
 Two-year note                 99-248/256   2.6411    0.012
 Three-year note               100-40/256   2.6946    0.011
 Five-year note                100-16/256   2.7361    0.012
 Seven-year note               100-124/256  2.7974    0.012
 10-year note                  100-84/256   2.8369    0.011
 30-year bond                  100-84/256   2.9833    0.008
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       19.40        0.80      
 30-year vs 5-year yield       24.70        0.15      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        18.25         0.00    
 U.S. 3-year dollar swap        16.75        -0.25    
 U.S. 5-year dollar swap        13.50         0.25    
 U.S. 10-year dollar swap        7.50         0.00    
 U.S. 30-year dollar swap       -5.00         0.00    
 (Reporting by Richard Leong; Editing by David Gregorio)
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