June 16, 2017 / 3:32 PM / a year ago

TREASURIES-Yields dip as U.S. data fuels doubts over Fed rate hikes

    * U.S. May housing starts weaker than expected
    * Data compounds doubts over third Fed rate hike in 2017
    * Yields on 2-30 year Treasuries set for weekly declines

    By Sam Forgione
    NEW YORK, June 16 (Reuters) - U.S. Treasury yields edged
lower on Friday, with all maturities on track for weekly
declines, after weaker-than-expected U.S. housing data fueled
doubts that the Federal Reserve will be able to raise interest
rates again this year. 
    Housing starts dropped 5.5 percent to a seasonally adjusted
annual rate of 1.09 million units in May, the Commerce
Department said on Friday. That was the lowest since September
2016. Economists polled by Reuters had forecast groundbreaking
activity rising to a rate of 1.22 million units.
    Analysts said the data compounded concerns about the
underlying health of the U.S. economy after government figures 
on inflation and retail sales for May, released on Wednesday,
fell well short of market expectations.
    The data also reinforced traders' doubts, analysts said,
that the Fed would be able to hike again later this year, as the
central bank projected Wednesday, when it raised interest rates
for the second time in 2017.
    "If housing is weak, then economic growth is going to be
weaker, too," said Stan Shipley, fixed income strategist at
Evercore ISI in New York. "The Fed may be a little more cautious
hiking in that environment."
    Benchmark 10-year Treasuries were last up 2/32
in price to yield 2.153 percent, compared with 2.162 percent
late Thursday. Two-year Treasuries were last up 2/32
in price to yield 1.319 percent, compared with 1.355 percent
late Thursday. 
    Traders are particularly concerned about soft U.S. inflation
readings, which have been viewed as an obstacle to the Fed's
plan, outlined on Wednesday, to start reducing its $4.2 trillion
portfolio of Treasury bonds and mortgage-backed securities,
while raising rates for a third time this year. 
    "Really, what’s causing the markets to be somewhat skeptical
of the Fed’s hiking path is that inflation has been trending
downwards," said Praveen Korapaty, global head of rates at
Credit Suisse in New York.
    "There is some weakness in other data as well, but from my
perspective the critical thing is the trajectory of inflation."
    Korapaty said, however, that he expects inflation to recover
and that Credit Suisse expects the Fed to start paring its
balance sheet in September and increase rates again in December.
    Yields on Treasuries maturing between two and 30 years were
set for weekly declines after rising the previous week.
Benchmark 10-year yields were set to fall about five basis
points for the week. 
  June 16 Friday 11:04AM New York / 1504 GMT
 US T BONDS SEP7               155-21/32    0-6/32    
 10YR TNotes SEP7              126-208/256  0-44/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.9925       1.0087    -0.010
 Six-month bills               1.1025       1.1239    -0.003
 Two-year note                 99-222/256   1.3192    -0.036
 Three-year note               100-20/256   1.4732    -0.024
 Five-year note                100-8/256    1.7433    -0.019
 Seven-year note               100-52/256   1.9685    -0.015
 10-year note                  101-248/256  2.1531    -0.009
 30-year bond                  104-96/256   2.7834    -0.002
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        20.75         2.00    
 U.S. 3-year dollar swap        16.50         0.25    
 U.S. 5-year dollar swap         7.25        -0.25    
 U.S. 10-year dollar swap       -3.25        -0.50    
 U.S. 30-year dollar swap      -38.00        -1.00    
 (Reporting by Sam Forgione; Editing by Steve Orlofsky)
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