September 28, 2017 / 7:29 PM / a year ago

TREASURIES-U.S. yield curve steepens as tax plan spurs borrowing concerns

    * U.S. sells $28 bln seven-year notes to strong demand
    * U.S. 10-year yield breaks above 200-day moving average
    * U.S. 2-year yield subsides from near nine-year high

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Sept 28 (Reuters) - The yield spread between
shorter and longer-dated U.S. Treasuries grew on Thursday in the
aftermath of a tax plan that raised concerns about faster growth
in the federal deficit and borrowing.
    The two-year Treasury yield reached a near nine-year high
and the 10-year yield hit an 11-week peak before they retreated
on bargain-hunting and strong demand at a $28 billion auction of
seven-year notes, which was the final part of this week's $88
billon fixed-rate debt supply.
    "Much of the move has been about the tax rollout," said
Bruno Braizinha, interest rate strategist at SG Corporate &
Investment Banking in New York. "Based on recent history like
healthcare reform, it may be a disappointment."
    On Wednesday, President Donald Trump proposed steep tax cuts
for most Americans and businesses, but provided scant details on
how to offset them without adding to the country's $20 trillion
in national debt.
    The yield on 10-year Treasury notes was 2.309
percent, unchanged from Wednesday. It reached 2.359 percent
earlier on Thursday, the highest since July 13, and traded above
its 200-day moving average for the first time since Aug. 1,
Reuters data showed.
    The two-year yield retreated from near nine-year
highs tied to bets the Federal Reserve would raise short-term
interest rates in December. It ended at 1.455 percent, down 2.7
basis points after hitting 1.499 percent earlier on Thursday,
which was the highest since November 2008.
    On Tuesday, Fed Chair Janet Yellen said the U.S. central
bank is on track to raise rates further even as inflation
remains below its 2 percent goal.
    Federal funds futures implied traders saw a 73 percent
chance the Fed would raise rates at its Dec. 12-13 policy
meeting, lower than 78 percent late Wednesday,
according to CME Group's FedWatch program.
    Proposed tax cuts from Washington in a bid to boost business
activity and consumer spending is seen as one of the factors
that could further steepen the U.S. yield curve in the coming
months, analysts said.
    The spread between two-year and 10-year yields widened to as
much as 87 basis points, which was last seen in Aug. 23, before
finishing at 85 basis points.
    Possible rate increases or reduced bond purchases from other
major foreign central banks may further stoke the rise in
longer-dated bond yields faster than short-dated ones.
    "We are in a bear steepening environment over the next
couple months," Braizinha said.
  September 28 Thursday 3:15PM New York / 1915 GMT
 US T BONDS DEC7               152-23/32    -0-7/32   
 10YR TNotes DEC7              125-136/256  0-24/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.04         1.0572    -0.008
 Six-month bills               1.17         1.1933    -0.003
 Two-year note                 99-216/256   1.4547    -0.027
 Three-year note               99-104/256   1.5809    -0.024
 Five-year note                99-228/256   1.8981    -0.021
 Seven-year note               98-96/256    2.1287    -0.009
 10-year note                  99-116/256   2.3121    0.003
 30-year bond                  97-152/256   2.8704    0.008
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        25.50         0.75    
 U.S. 3-year dollar swap        23.50         0.00    
 U.S. 5-year dollar swap         7.75        -0.25    
 U.S. 10-year dollar swap       -4.00         0.25    
 U.S. 30-year dollar swap      -32.75         0.50    

 (Reporting by Richard Leong; Editing by Dan Grebler and Chizu
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