October 17, 2017 / 4:08 PM / 5 months ago

TREASURIES-Yield curve flattens as 2-year yields hit nearly 9-year high

    * 2-year yields hit highest in nearly 9 years
    * Expectations for more hawkish Fed boost short-dated yields
    * U.S. import prices rise to highest since June 2016
    * Long-term inflation indicators continue to lag

 (Recasts opening, adds data, quotes)
    By Dion Rabouin
    NEW YORK, Oct 17 (Reuters) - The U.S. Treasury yield curve
flattened on Tuesday as 2-year yields rose to their highest
level since November 2008 and longer-dated maturities saw yields
    Yields on 5-year notes touched their highest level since
Oct. 6 while 30-year yields fell to the lowest since Sept. 27.
That pushed the yield spread between 5- and 30-year maturities
to 83.94 basis points, the lowest level since November 2007.
    The difference between yields of Treasuries maturing in two
years and those maturing in 10 years fell to the lowest since
August 2016.
    Analysts said the spread compression between shorter- and
longer-dated maturities was due to increased expectations for
interest rate tightening by the Federal Reserve and low
confidence in long-term inflation, as indicators of U.S. price
growth have been weak.
    A report Monday that Stanford economist John Taylor had
impressed in his meeting with U.S. President Donald Trump and
was a viable nominee to succeed current Fed Chair Janet Yellen
helped accelerate the upward pace of short-dated Treasury
    "Prior to this meeting the thinking was that Trump would
want to pick someone relatively dovish because given his plans
for fiscal policy that would line up better," said Tom Simons,
money market economist at Jeffries and Co. in New York. "With
Taylor coming into center stage not only is he hawkish but much
more hawkish than the rest of the candidates being considered."
    Yellen on Sunday said the U.S economy remains strong and
expects to continue gradual interest rates increases despite
subdued inflation readings much of the year.             
    "It’s a little bit of a convergence of expectations for Fed
policy at the short end which is getting more hawkish, not only
Janet Yellen and what she’s saying but the potential for a Fed
governor who could be even more hawkish," said Justin
Hoogendoorn, head of fixed income strategy at Piper Jaffray &
Co. in Chicago.
    Stronger-than-expected data on U.S. import prices also
helped boost yields on shorter-dated maturities. The Labor
Department said import prices jumped 0.7 percent last month, the
biggest gain since June 2016, after an unrevised 0.6 percent
rise in August.
    Hoogendoorn highlighted technology, aging populations in
large economies like the United States and Europe and global
trade as headwinds to long-term inflation.
    "All of these trends are combining to hit the long-end of
the market and Yellen is surprised at how low inflation is, but
when you look at global trends it’s not that surprising," he

 (Reporting by Dion Rabouin; Editing by Susan Thomas and Chizu
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