June 29, 2018 / 1:33 PM / 5 months ago

TREASURIES-Yield curve flattest since 2007, consumer spending disappoints

* U.S. consumer spending moderates in May

* ECB may buy more long-dated bonds

By Karen Brettell

NEW YORK, June 29 (Reuters) - The U.S. Treasury yield curve hit its flattest level in more than 10 years on Friday after U.S. consumer spending data disappointed some analysts’ expectations.

Data showed consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose only 0.2 percent last month. Data for April was also revised down to show spending rising 0.5 percent instead of the previously reported 0.6 percent jump.

It came as U.S. consumer prices accelerated in the year to May, with a measure of underlying inflation hitting the Federal Reserve’s 2 percent target for the first time in six years.

The core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, rose 0.2 percent after a similar gain in April.

“While inflation is back to the 2 percent level on year over year core PCE, the spending aspect of tax reforms doesn’t seem to have come to fruition, all of which suggests that the curve is going to continue to grind flatter while the Fed pushes forward with at least a few more rate hikes,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

The yield curve between two-year and 10-year notes flattened to 31 basis points on Friday, the flattest level since 2007.

The European Central Bank is considering buying more long-dated bonds from next year to keep euro zone borrowing costs in check even after it stops pumping fresh money into the economy, sources told Reuters.

That could add an additional flattening pressure to U.S. and European yield curves.

Trade concerns have dominated this week and sent 10-year yields to their lowest levels in a month as investors worry that tighter restrictions will reduce growth globally.

Benchmark 10-year notes were unchanged on the day on Friday to yield 2.847 percent, after falling as low as 2.822 percent on Thursday, the lowest since May 31.

The next major economic release will be next week’s employment report for June, which will be scoured for any indications of rising wage pressures.

The Federal Reserve is also due to release minutes from its June meeting on Thursday. Fed policymakers earlier this month said two additional rate hikes are expected by the end of this year, compared with one previously. (Editing by David Gregorio) )

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