April 11, 2018 / 7:51 PM / 3 months ago

TREASURIES-Yields retreat on Syria fears; curve flattest in 10 years

    * U.S. CPI falls, but core rises; neutral impact on yields
    * Possible U.S. action in Syria weighs on yields
    * U.S. 10-year note auction shows tepid demand
    * Fed minutes affirms gradual rate hike path

 (Adds comment, results of 10-year auction; updates prices,
table)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, April 11 (Reuters) - U.S. Treasury yields declined
on Wednesday on escalating geopolitical tensions after President
Donald Trump warned Russia of imminent military action in Syria
over a suspected poison gas attack.
    Trump declared on Wednesday that missiles "will be coming,"
as he lambasted Russia for standing by Syrian President Bashar
al-Assad following a suspected gas attack that killed more than
40 people and affected hundreds of others.
    U.S. benchmark 10-year note and 30-year bond yields, which
move inversely to prices, slid to one-week lows, while 2-year
yields slipped after two days of gains.
    "This is mostly geopolitical tension," said Kim Rupert,
managing director of global fixed income at Action Economics in
San Francisco. "There are concerns obviously in the Middle East
and what might happen. So risks are certainly higher."
    Yields, however, briefly edged higher after modestly hawkish
minutes from the Federal Reserve's last policy meeting, as
policymakers felt the U.S. economy would firm further and
inflation would rise in the coming months.
    "These minutes have a hawkish lean," said Collin Martin,
senior fixed income research analyst, at Schwab Center for
Financial Research in New York. "To us, the Fed will continue to
raise rates at a gradual pace."
    The U.S. yield curve flattened further on Wednesday, with
the gap between U.S. 2-year and 10-year note yields 
 at their narrowest in 10 years. Analysts said
that reflected a scenario of a Fed raising interest rates at a
time when investors think there is very little inflation in the
economy.
    Yields also rose after a lackluster U.S. 10-year note
auction that drew its lowest demand in nearly 1-1/2 years from
so-called "indirect bidders", which include fund managers and
foreign central banks.
    Action Economics' Rupert noted that demand for Treasuries
has been tepid over the last 12 months. This, she said,
signifies the fact that the Fed has been raising interest rates
and that investors expect more government bond supply on the way
to finance the country's budget deficit 
    In afternoon trading, the U.S. 10-year yields were down at
2.7826 percent, from 2.797 percent late on Tuesday.
    U.S. 30-year yields sank to 2.995 percent, from
Tuesday's 3.017 percent.
    On the front end of the curve, U.S. 2-year yields dipped to
2.311 percent, compared with 2.315 percent on
Tuesday.
    Earlier data showing a rise in U.S. core inflation for
March, which was up 0.2 percent and matched February's increase
rise, failed to boost yields, as headline consumer prices fell
for the first time in 10 months.
    
    Wednesday, April 11 at 1532 EDT (1932 GMT):
                               Price                  
 US T BONDS JUN8               146-10/32    0-12/32   
 10YR TNotes JUN8              120-232/256  0-36/256  
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             1.7025       1.7336    -0.002
 Six-month bills               1.885        1.9296    -0.005
 Two-year note                 99-226/256   2.3111    -0.004
 Three-year note               99-204/256   2.4457    -0.009
 Five-year note                99-122/256   2.6129    -0.010
 Seven-year note               99-96/256    2.724     -0.015
 10-year note                  99-188/256   2.7808    -0.016
 30-year bond                  100-28/256   2.9943    -0.023
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        30.75         0.75    
 spread                                               
 U.S. 3-year dollar swap        24.50         0.25    
 spread                                               
 U.S. 5-year dollar swap        13.50         0.75    
 spread                                               
 U.S. 10-year dollar swap        3.50         0.50    
 spread                                               
 U.S. 30-year dollar swap      -13.50         0.75    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Chizu Nomiyama and Susan Thomas)
  
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