November 13, 2017 / 8:39 PM / a year ago

TREASURIES-U.S. two-year yields hit 9-year peak, curve flattening resumes

    * Yield curve flattening trend intact
    * Friday's steepening trend more supply-driven
    * Flat yield curve does not necessarily mean

 (Adds comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Nov 13 (Reuters) - U.S. Treasury two-year note
yields hit a fresh nine-year high on Monday, as the yield curve
resumed its flattening and investors priced in a 25-basis-point
interest rate hike by the Federal Reserve in December.
    A flat yield curve suggests the Fed is on course to hike
interest rates, even though tepid inflation should cap
longer-dated yields.
    Philadelphia Fed President Patrick Harker earlier on Monday
supported the yield flattening view. He said in Tokyo that he
has "lightly penciled in" a December rate hike. However, he 
said he had slightly less conviction about the policy decision
than he had last month as he "continues to elicit caution" about
weak inflation.
    The yield gap between shorter-dated and longer-dated
Treasuries shrank on Monday, with the spread between five-year
and 30-year yields at 79.30 basis points.
    The spread between U.S. two-year note yields and U.S.
10-year notes also contracted to 71.30 basis points.

    On Friday, the yield curve steepened as dealers reduced
their holdings of longer-dated debt following last week's
    "The steepening might have been supply-driven and perhaps
now that we're past supply, more people are coming in to buy the
long end," said Gennadiy Goldberg, interest rates strategist at
TD Securities in New York. 
    Aside from rate hike expectations, the Treasury's posture
also contributed to the flatter curve, as the government planned
to finance much of next year' deficit through bills, and avoided
bringing longer-dated paper into the financing calendar,
according to Action Economics.
    Often flatter and especially inverted yield curves suggest
an incoming economic slowdown, although strategists were not
clear that is true in this case.
    "There's a lot of fears that a flatter curve is an indicator
of recession," said TD's Goldberg. "It's not necessarily so.
We're still steeper than where we were in previous (recession)
cycles. I don't think we're near levels that would indicate a
    In afternoon trading, the 10-year Treasury yield
was at 2.402 percent, up slightly from 2.4 percent late on
    The two-year yield hit a nine-year peak of 1.687 
percent, up from 1.662 percent last Friday.
    U.S. 30-year yields, meanwhile, fell to 2.867
percent, from Friday's 2.88 percent
      November 13 Monday 3:24PM New York / 2024 GMT
 US T BONDS DEC7               152-13/32    0-3/32    
 10YR TNotes DEC7              124-156/256  -0-24/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.195        1.2151    -0.015
 Six-month bills               1.3425       1.3702    0.007
 Two-year note                 99-164/256   1.6869    0.025
 Three-year note               99-206/256   1.8172    0.029
 Five-year note                99-166/256   2.0749    0.020
 Seven-year note               99-216/256   2.2743    0.012
 10-year note                  98-168/256   2.402     0.002
 30-year bond                  97-160/256   2.8686    -0.011
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        19.25        -0.50    
 U.S. 3-year dollar swap        17.50        -0.25    
 U.S. 5-year dollar swap         6.25         0.00    
 U.S. 10-year dollar swap       -1.75         0.50    
 U.S. 30-year dollar swap      -25.25         1.50    
 (Reporting by Gertrude Chavez-Dreyfuss
editing by Jeffrey Benkoe and Jonathan Oatis)
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