October 31, 2019 / 2:30 PM / 18 days ago

TREASURIES-Yield curve flattens as consumer spending casts doubt on growth

NEW YORK, Oct 31 (Reuters) - The U.S. Treasury yield curve was flatter in early trading on Thursday after data showing a marginal rise in consumer spending in September cast doubts on consumers’ ability to continue driving the economy as business investment slumps.

The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, gained 0.2% last month, powered by the lowest unemployment rate in nearly 50 years.

But business investment has contracted for two straight quarters because of U.S. President Donald Trump’s trade war with China, and market participants are concerned that weakness could spill into the labor market and hit consumer spending.

The report also showed that inflation was tame in September. Consumer prices, as measured by the personal consumption expenditures price index excluding the volatile food and energy components, also known as core PCE, was unchanged last month after gaining 0.1% in August.

“The bulk of the story is a reaction to the fact that core PCE disappointed,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “The early signs of inflation we saw a few months ago have dissipated, and contributed to the risk-off trade,” he said.

The spread between two- and 10-year yields stood at 15.5 basis points Thursday morning, down from a close of 17.2 basis points on Wednesday. The flattening yield curve indicates market participants believe the U.S. Federal Reserve may be pausing its interest rate cuts too soon.

Even before the release of the data, yields were lower, holding overnight declines sparked by the Fed’s interest rate cut on Wednesday.

Yields declined on Wednesday after the U.S. central bank lowered its policy rate by a quarter of a percentage point to help the United States weather the trade war. The Fed also used new language to describe how it would monitor conditions, a change signaling it would pause rate cuts in the future.

“Generally speaking the theme at this point is a lower-rate environment for longer. While the Fed has presumably ended the first three cuts of their campaign, the markets’ vote at this point is that might not be enough, which is why we are seeing a flatter curve,” said Lyngen.

The yield on the two-year Treasury note was 8 basis points lower at 1.550% in morning trading. The yield on the 10-year Treasury note was 9.1 basis points lower at 1.715%.

Reporting by Kate Duguid and Ross Kerber; Editing by Dan Grebler

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