March 14, 2018 / 2:07 PM / 3 days ago

TREASURIES-Yield curve flattens on soft data, Washington shakeup

    * Spread between five- and 30-year yields falls 3 basis
    * U.S. retail sales fall for third straight month

    By Kate Duguid
    NEW YORK, March 14 (Reuters) - The U.S. yield curve
flattened further on Wednesday as retail sales data fell for the
third straight month and as a close congressional election in
Pennsylvania and the ouster of Secretary of State Rex Tillerson
refocused the market on American politics.
    U.S. retail sales fell 0.1 percent in February, pointing to
a slowdown in economic growth in the first quarter.
    "The retail sales number was surprisingly soft – everybody
will have to mark down first-quarter growth expectations off of
that because we’ve now had a couple soft months in a row," said
Michael Cloherty, head of U.S. rates strategy at RBC Securities
in New York. 
     Wednesday morning's numbers come on the heels of the Labor
Department's report yesterday that its Consumer Price Index rose
0.2 percent last month, in line with expectations, but
significantly slower than January's 0.5 percent. The yield on
the benchmark government bond opened lower on
Wednesday morning, following a 2-basis-point drop on Tuesday. 
    Weak retail sales in February dampened further traders'
expectations of a fourth interest rate hike in 2018. The
probability dropped 80 basis points between Monday and Tuesday,
falling again this morning to 26.4 percent, according to CME
Group's FedWatch tool. 
    The spread between five-year notes and 30-year bonds, an
indicator of the shape of the yield curve, lowered to 44.9 basis
points on Wednesday, 3 basis points below its last close. 
    "Long-term, continuing rate hikes will keep the flattening
going," said Cloherty. "But I think we’re a little flatter than
we should be right now. So in the short term, I don’t expect
this (flattening) to continue." 
    Also driving down yields has been political volatility in
Washington. President Donald Trump's ouster of the secretary of
state on Tuesday spooked markets briefly. But the results of the
special congressional election in Pennsylvania on Tuesday night
compounded the sense of instability, driving traders into U.S.
government bonds, a traditional safe-haven investment. 
    The U.S. House of Representatives race in Pennsylvania that
is seen as a referendum on Trump's White House performance was a
dead heat on Tuesday, an ominous sign for Republicans eight
months ahead of midterm congressional elections. The district
was previously a solidly Republican one that Trump won by almost
20 percentage points in the 2016 presidential election.

    At 9:50 a.m. (1350 GMT) the yield on the 10-year Treasury
note was 2.835 percent, below yesterday's close at 2.848
percent. The two-year yield, which is particularly
sensitive to rate hike expectations, rose to 2.279 percent,
above Tuesday's close at 2.262 percent, likely in anticipation
of next week's Federal Open Market Committee meeting at which
the Fed is expected to raise interest rates. 

  March 14 Wednesday 9:58AM New York / 1358 GMT
 US T BONDS JUN8               144-15/32    0-11/32   
 10YR TNotes JUN8              120-92/256   0-8/256   
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.7225       1.7541    0.028
 Six-month bills               1.8975       1.9425    0.033
 Two-year note                 99-242/256   2.2785    0.016
 Three-year note               99-216/256   2.4293    0.005
 Five-year note                99-248/256   2.6316    0.002
 Seven-year note               99-220/256   2.7722    -0.005
 10-year note                  99-60/256    2.8389    -0.009
 30-year bond                  98-116/256   3.0794    -0.022
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        31.00        -1.25    
 U.S. 3-year dollar swap        26.50        -0.75    
 U.S. 5-year dollar swap        15.25        -0.50    
 U.S. 10-year dollar swap        4.25        -0.50    
 U.S. 30-year dollar swap      -14.00         0.00    

 (Reporting by Kate Duguid)
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