March 28, 2018 / 7:43 PM / a year ago

TREASURIES-U.S. yield curve flattens on weak auction, stock market swings

    * Longer-dated yields underpinned by stock market gyration 
    * Shorter-term yields rise after lousy 7-year note sale 
    * Treasuries set to earn biggest monthly return since August
    * U.S. Q4 GDP revised up to 1.9 pct, beating forecasts

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, March 28 (Reuters) - The margin between short- and
long-dated U.S. Treasury yields shrank on Wednesday as
quarter-end buying for portfolio rebalancing and safe-haven
demand due to growing stock market losses pushed the benchmark
10-year yield to seven-week lows.
    On the other hand, weak demand at a $29 billion auction of
seven-year notes, the final leg of this week's record high $294
billion in government debt supply, propelled shorter maturity
yields higher.
    "It wasn't a great auction," said James Ong, senior macro
strategist at Invesco in Atlanta. "But I wouldn't read too much
into one auction."
    All the other Treasuries auctions this week were met with
average demand, according to analysts. 
    The $14.6 trillion bond sector, which investors now favor
over stocks, has produced a 0.68 percent total return in March
for its strongest month since last August, according to an index
compiled by Bloomberg and Barclays. 
    "We are seeing a strong bid this week, reflecting a
flight-to-quality demand," said Bill Merz, head of fixed income
research at U.S. Bank Wealth Management in Minneapolis. "It's
been exacerbated by short-covering."
    This week traders have exited short positions or bets on
bond yields to rise as U.S. stock prices fell on worries about a
trade war between the United States and China and a scandal over
political consultants accessing Facebook user data.

    Speculators had heavy net short positions in Treasury
futures with near record net shorts in five-year T-notes,
according to data from the Commodity Futures Trading Commission
released last Friday.
    The yield on 10-year Treasury notes was down 1.5
basis points at 2.773 percent. It hit a seven-week low of 2.743
percent earlier.
    Two-year Treasury yields were up 0.4 basis point 
at 2.282 percent. 
    The spread between two-year and 30-year yields
 contracted to 72 basis points, its tightest level
since September 2007, Tradeweb and Reuters data showed.
    Wall Street's three major indexes were down for a second
day, on track for their biggest monthly loss since January 2016.

    Given this week's stock market volatility, bond yields will
likely test lower levels ahead of a three-day weekend, Invesco's
Ong said.
    The U.S. bond market will close early at 2 p.m. (1800 GMT)
on Thursday and shut for the Good Friday holiday.    
    On the data front, the government revised up its reading on
domestic economic growth in the fourth quarter to 2.9 percent
from 2.5 percent. Analysts polled by Reuters had forecast an
adjustment higher to 2.7 percent.
   Wednesday, March 28 at 1525 EDT (1925 GMT): 
 US T BONDS JUN8               145-29/32    0-9/32     
 10YR TNotes JUN8              120-236/256  0-4/256    
                               Price        Current    Net
                                            Yield      Change
                                            (pct)      (bps)
 Three-month bills             1.7025       1.7336     -0.041
 Six-month bills               1.8925       1.9373     0.000
 Two-year note                 99-240/256   2.2822     0.004
 Three-year note               99-234/256   2.405      0.008
 Five-year note                99-148/256   2.5906     -0.001
 Seven-year note               100-64/256   2.7099     -0.002
 10-year note                  99-204/256   2.7734     -0.015
 30-year bond                  99-200/256   3.011      -0.020
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
 U.S. 2-year dollar swap        28.00         0.50     
 U.S. 3-year dollar swap        24.00        -0.25     
 U.S. 5-year dollar swap        12.25        -0.75     
 U.S. 10-year dollar swap        2.25         0.75     
 U.S. 30-year dollar swap      -16.75         0.50     

 (Reporting by Richard Leong; Editing by David Gregorio)
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