December 20, 2017 / 7:55 PM / a month ago

TREASURIES-Yields at nine-month highs on tax growth optimism

 (Adds data, quote; Updates prices)
    * Tax reform boosts growth expectations
    * 10-year yields highest since March

    By Karen Brettell and Kate Duguid
    NEW YORK, Dec 20 (Reuters) - U.S. Treasury yields rose to
nine-month highs on Wednesday on optimism a U.S. tax overhaul
will help boost growth and as economic data improves.
    The Republican-controlled U.S. House of Representatives gave
final approval to the biggest overhaul of the U.S. tax code in
30 years, sending a sweeping $1.5 trillion bill to President
Donald Trump for his signature.             
    Many investors expect that tax cuts will help spur
investment and spending that will in turn boost the economy and
increase stubbornly low inflation.
    “The tax reform is really what’s been driving yields as well
as risky assets over the last few trading sessions,” said
Subadra Rajappa, head of U.S. rates strategy at Societe Generale
in New York. Also, “we’ve seen strong data, so that typically
tends to cause a selloff.”
    In economic news, U.S. existing home sales increased more
than expected in November, hitting their highest level in nearly
11 years, the latest indication that housing was regaining
momentum after almost stalling this year.             
    Yields on the U.S. government benchmark bond remained lofty,
though off earlier highs following the announcement.
    Looking ahead, the market will be paying attention to the
core Personal Consumption Expenditures index reported on Friday,
which measures price changes in consumer goods and services. 
    The Federal Reserve's favored gauge of inflation will come
as levels have moderated for much for this year. Continued
weakness could complicate the central bank's deliberations about
raising rates in 2018. 
    "Given the disappointment in core CPI I think expectations
for a benign report are pretty much priced in,” said Ian Lyngen,
head of U.S. rates strategy at BMO Capital Markets in New York. 
    The U.S. core Consumer Price Index (CPI) slowed in November
to an annual increase of 1.7 percent from 1.8 percent the
previous month.             
    Benchmark 10-year notes             were down 8/32 in price
to yield 2.480 percent, up from 2.463 percent on Monday. The
yields earlier rose to 2.497 percent, the highest since March
21.
    The yield curve between two-year and 10-year notes
              also steepened as high as 63 basis points, a
record since Nov. 30 as longer-dated notes underperformed on
growth optimism and as some traders unwound positions that had
been betting on further flattening.
    “There’s been something of a positional stop-out in the
flattening trade that’s been reasonably popular in the past few
weeks,” said Lyngen.

 (Editing by Susan Thomas a)
  
 
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