October 17, 2017 / 7:18 PM / 2 months ago

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

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

 (Updates to afternoon trading)
    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 yields on longer-dated maturities
declined.
    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 minimal
signs of a pick-up in long-term inflation, as indicators of U.S.
price growth have been consistently weak this year.
    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 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.
    A report on Monday that Stanford University economist John
Taylor had impressed in his meeting with President Donald Trump
and was a viable nominee to succeed Fed Chair Janet Yellen
accelerated the upward pace of short-dated Treasury yields.
    "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 Jefferies 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."
    Central bankers more concerned with maintaining low
inflation favor higher interest rates, while dovish central
bankers favor maintaining low unemployment with lower rates.
    Yellen on Sunday said the U.S economy remains strong and
that she expects to continue gradual interest rate 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.
    Hoogendoorn highlighted technology, aging populations in
large economies like the United States and Europe and global
trade as headwinds to long-term inflation growth.
    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.             
    

 (Reporting by Dion Rabouin; Editing by Chizu Nomiyama and Dan
Grebler)
  

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