April 27, 2018 / 7:46 PM / 25 days ago

TREASURIES-U.S. yield curve flattened by global growth doubts

    * U.S. Q1 GDP slows but less than forecast; ECI accelerates
    * Soft U.K., French growth raises doubt on higher yields 
    * U.S. 10-year yield holds below 3 pct, 2-year under 2.5 pct
    * Treasury supply forecast, Fed meeting, jobs data on tap

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, April 27 (Reuters) - The margin between U.S.
shorter-dated Treasury yields and longer-dated ones shrank on
Friday on investors' skepticism about the global economy even as
the United States fared better than other nations in the first
quarter.
    U.S. gross domestic product, the government's broadest
economic gauge, grew at a 2.3 percent annualized pace in the
first three months of 2018, slower than the 2.9 percent rate in
the prior quarter, the government said. The recent GDP growth
came in stronger than the 2.0 percent increase forecast among
economists polled by Reuters.
    Earlier Friday, Britain posted its weakest quarterly growth
in five years, while France's economic expansion slowed more
than expected.
    "The bond market is not believing. It's skeptical about
global growth and inflation," said James Camp, managing director
of fixed income at Eagle Asset Management at St. Petersburg,
Florida.
    The 10-year Treasury yield fell 3.1 basis points
to 2.959 percent. It reached 3.035 percent on Wednesday, its
highest level since January 2014. 
    Two-year note yield slipped 0.8 basis point to
2.484 percent after it hit 2.508 percent two days ago, which was
last seen in September 2008.
    The gap between two-year and 10-year yields
narrowed by 2.4 basis points to 47.3 basis points after reaching
54.6 basis points on Thursday, its steepest level in a month. It
remained above the flattest level in over a decade set last week
at 41.1 basis points.
    Still the smaller-than-expected decline in GDP renewed bets
the Federal Reserve would stick to its rate-hike campaign to
keep inflation in check, investors said.
    Another encouraging sign was a pickup in wage pressure. The
government's employment cost index rose 0.8 percent in the first
quarter, which was above the prior quarter's 0.6 percent. 
    Relatively solid demand for this week's $96 billion in
fixed-rate, coupon-bearing Treasuries reduced jitters about
investors' appetite for U.S. government debt. This spurred
month-end demand for longer-dated Treasuries, pushing the
10-year yield back below 3 percent.  
    There have been concerns whether fund managers and foreign
central banks may pare their Treasury holdings as the U.S.
government is expected to ramp up its borrowing to cover a 
widening budget gap.
    "It contributed to yields moving up, but it's been largely
priced into the market," said John Bellows, portfolio manager at
Western Asset Management Co. in Pasadena, California.
    Supply concerns were mitigated by disappointing economic
data in Europe and perceived dovish signals from the European
Central Bank and Bank of Japan, analysts said.
    Nevertheless, investors were not yet loading up on
Treasuries ahead of the government's latest projection of its
borrowing needs, the Fed's next two-day policy meeting and the
Labor Department's April payrolls report, which are scheduled
for next week, they said.
    Friday, April 27 at 1507 EDT(1907 GMT):
                               Price                   
 US T BONDS JUN8               143-6/32     0-26/32    
 10YR TNotes JUN8              119-124/256  0-44/256   
                               Price        Current    Net
                                            Yield      Change
                                            (pct)      (bps)
 Three-month bills             1.78         1.8125     -0.015
 Six-month bills               1.965        2.0118     -0.005
 Two-year note                 99-200/256   2.4878     -0.004
 Three-year note               99-78/256    2.6205     -0.007
 Five-year note                99-194/256   2.8023     -0.017
 Seven-year note               99-184/256   2.9197     -0.028
 10-year note                  98-56/256    2.9605     -0.030
 30-year bond                  97-140/256   3.127      -0.047
                                                       
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
                                            Change     
                                            (bps)      
 U.S. 2-year dollar swap        24.50        -0.75     
 spread                                                
 U.S. 3-year dollar swap        21.00        -0.50     
 spread                                                
 U.S. 5-year dollar swap        10.75         0.00     
 spread                                                
 U.S. 10-year dollar swap        2.75         0.00     
 spread                                                
 U.S. 30-year dollar swap      -11.50         0.75     
 spread                                                
 

    
 (Reporting by Richard Leong
Editing by Chizu Nomiyama)
  
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