November 7, 2017 / 8:38 PM / a year ago

TREASURIES-U.S. yield curve flattens; volatility hovers at record low

    * U.S. 3-year note supply sold at highest yield since 2010
    * U.S. yield curve flattens to levels not seen in a decade
    * Bond market volatility measures close to record lows

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Nov 7 (Reuters) - U.S. Treasury yields fell on
Tuesday, flattening the yield curve to a level not seen in a
decade, as $24 billion worth of three-year government debt, the
first leg of this week's $64 billion quarterly refunding,
fetched average demand.
    The drop in longer-dated yields with 30-year yields touching
a six-week low, pinned short-term gauges of Treasury market
volatility near all-time lows.
    "It was a quiet, firm day for the market. We have a pretty
strong flattening trend that will probably continue into 2018,"
said John Canavan, market strategist at Stone & McCarthy
Research Associates in New York.
    Traders have favored longer-dated Treasuries over
shorter-dated issues on expectations of further interest rate
increases from the Federal Reserve and domestic inflation
staying below the Fed's 2-percent target, analysts said.
    Uncertainty about the passage of a Republican-sponsored bill
to overhaul the federal tax code and diminished likelihood the
government will introduce a Treasury bond that matures beyond 30
years have increased the appeal of "curve-flattener" trades,
they said.
    The two-year yield was a tad higher at 1.629
percent, while the 10-year yield slipped 1 basis
point at 2.307 percent. This still narrowed their yield spread
to just over 67 basis points, which was the
tightest since  November 2007, Reuters data showed.    
    The 30-year yield shed 3 basis points at 2.769
percent, a hair above a six-week low of 2.765 percent.
    The latest three-year note supply enticed
average demand from investors, resulting in the highest yield
for this maturity at an auction since April 2010, Treasury data
    The Treasury Department will auction $23 billion in 10-year
debt on Wednesday and $15 billion in 30-year
bonds on Thursday.
    Meanwhile, the curve flattening has coincided with the drop
in short-term market volatility, which is a proxy of investors'
confidence that inflation would stay low and the Federal Reserve
will unlikely deviate from its gradual pace to raising
short-term rates.
    The CBOE 10-year U.S. Treasury Note Volatility Index
, which is seen as the bond market's counterpart to the
VIX index for Wall Street, reached an all-time low of 3.55 on
Friday before ticking up to 3.68 on Tuesday.
    Another gauge of short-term bond volatility, the Bank of
America Merrill Lynch one-month MOVE index, hit a record low of
45.05 on Monday.
    "Inflation is tame and is expected to remain tame. You are
going to see even lower volatility," Canavan said.
  November 7 Tuesday 3:24PM New York / 2024 GMT
 US T BONDS DEC7               154-21/32    0-14/32   
 10YR TNotes DEC7              125-100/256  0-8/256   
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.2          1.2204    0.007
 Six-month bills               1.305        1.3319    0.003
 Two-year note                 99-192/256   1.6289    0.008
 Three-year note               99-176/256   1.7346    0.006
 Five-year note                100-18/256   1.9851    -0.002
 Seven-year note               100-132/256  2.1699    -0.005
 10-year note                  99-124/256   2.3091    -0.011
 30-year bond                  99-152/256   2.77      -0.026
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       67.80        -1.30     
 30-year vs 5-year yield       78.40        -2.50     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        20.50         0.00    
 U.S. 3-year dollar swap        19.75        -0.50    
 U.S. 5-year dollar swap         7.25         0.00    
 U.S. 10-year dollar swap       -2.50         0.25    
 U.S. 30-year dollar swap      -26.25         1.00    

 (Reporting by Richard Leong; Editing by Andrea Ricci; editing
by Diane Craft)
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