July 6, 2018 / 8:23 PM / 4 months ago

TREASURIES-Yield curve flattest in 11 years on tepid wage inflation

* Two-year, 10-year yield curve flattest since 2007

* U.S. wages increased 0.2 pct in June

* Muted reaction to China/U.S. tariffs (New throughout, updates prices, market activity and comments)

By Karen Brettell and Kate Duguid

NEW YORK, July 6 (Reuters) - U.S. 10-year Treasury yields fell to their lowest levels in 5-1/2 weeks after jobs data for June showed that wage pressures were below economists’ expectations, and the Treasury yield curve flattened to its tightest since 2007.

Average hourly earnings rose 5 cents, or 0.2 percent, in June after increasing 0.3 percent in May. Economists had expected an 0.3 percent increase. Nonfarm payrolls increased by 213,000 jobs in the month.

The moderate wage growth should allay fears of a strong buildup in inflation pressures. The U.S. Federal Reserve’s preferred inflation measure hit the central bank’s 2 percent target in May for the first time in six years.

“Average hourly earnings are, I think, the number that most Treasury traders are laser-focused in these employment reports, that I think is why you got a little bit of an initial rally,” said Thomas Simons, a money market economist at Jefferies in New York.

The rise in the unemployment rate also “without going into the details doesn’t look great, but when you get down to it, it’s pretty good news overall,” Simons said.

Benchmark 10-year note yields fell to a session low of 2.807 percent, the lowest since May 30 and down from 2.832 percent before the data was released.

The yield curve between 2-year and 10-year notes flattened to 26.4 basis points, the tightest since 2007.

The yield curve has flattened as investors expect the Fed to continue raising interest rates even as long-term inflation looks to be subdued.

Minutes from the Fed’s June meeting released on Thursday gave the impression of a central bank impressed by the U.S. economy’s strength and confident in its plans to continue raising rates, but also concerned with what could push the economy off its upward course.

U.S. central bankers discussed whether recession lurked around the corner and expressed concerns global trade tensions could hit an economy that by most measures looked strong.

Bonds had muted reaction after the United States and China slapped tit-for-tat duties on $34 billion worth of the other’s imports, with Beijing accusing Washington of triggering the “largest-scale trade war” as the world’s two biggest economies sharply escalated their conflict.

Next week, investors will fill time before the release of consumer price index data on June 12 assessing the fallout from the increasing trade tensions between China and the United States, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. (Reporting by Karen Brettell and Kate Duguid Editing by Jonathan Oatis and David Gregorio)

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