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TREASURIES-U.S. bond yields fall from 4-month peaks
October 17, 2016 / 7:31 PM / a year ago

TREASURIES-U.S. bond yields fall from 4-month peaks

* Weaker stock prices renew bids for U.S. government debt
    * U.S. yield curve flattens from widest level in a month
    * N.Y. Fed business index falls unexpectedly in October
    * Fed "very close" to employment, inflation goals -Fischer

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Oct 17 (Reuters) - U.S. Treasury yields declined
after hitting four-month highs on Monday, as investors sought
bargains in bonds whose prices had dropped on Federal Reserve
Chair Janet Yellen's remarks last week which suggested that the
central bank might tolerate higher inflation.
    Losses on Wall Street stocks and a surprise drop in a New
York Federal Reserve gauge on regional business activity in
October also supported demand for bonds. 
    "People see decent value at these levels," said Sharon
Stark, fixed-income strategist at Incapital LLC in Boca Raton,
Florida.
    U.S. benchmark 10-year Treasury notes rose 8/32 in price for
a yield of 1.762 percent, down 3 basis points from Friday.
Earlier on Monday the 10-year yield reached 1.814 percent, the
highest since June 2, according to Reuters data.
    Wall Street indexes were 0.2 percent lower.  
    Yellen said on Friday the question was whether the damage
following the financial crisis of 2008-09 could be undone "by
temporarily running a 'high-pressure economy,' with robust
aggregate demand and a tight labor market." 
    Some traders interpreted her remarks as suggesting the
central bank might consider allowing inflation to run above the
Fed's 2.0 percent target. They sold more longer-dated Treasuries
than short-term ones in reaction to Yellen's comments, pushing
their spreads to their widest in about a month.
    "People are still digesting what Yellen said," said Justin
Lederer, interest rate strategist at Cantor Fitzgerald in New
York. "We hit the lows (in prices) overnight and it's been a
grind from there."
    The yield spread between five-year and 30-year Treasuries
reached 129 basis points earlier Monday before retreating to 126
basis points, which was nearly 1 basis point tighter than
Friday. 
    The decline in Treasury yields was mitigated by a strong
supply of corporate bonds with an expected $25 billion of
investment-grade issues to hit this week, according to IFR, a
unit of Thomson Reuters. 
    While economic data has been mixed, U.S. interest rates
futures implied traders saw nearly a 70 percent chance of a rate
hike in December, little changed from late Friday, according to
CME Group's FedWatch program. 
    On Monday, Fed Vice Chair Stanley Fischer said the central
bank was "very close" to its targets on domestic inflation and
unemployment. Fischer, however, did not specify the timing of a
rate hike. 
    Boston Fed President Eric Rosengren told Reuters the current
levels of jobs and inflation support the case for a rate
increase soon. 
    
  Monday, Oct. 17 at 1500 EDT (1900 GMT):
                               Price                  
 US T BONDS DEC6               163-31/32    24/32     
 10YR TNotes DEC6              130-32/256   68/256    
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             0.305        0.3095    0.006
 Six-month bills               0.4375       0.4445    -0.007
 Two-year note                 99-220/256   0.8228    -0.016
 Three-year note               100-14/256   0.9814    -0.019
 Five-year note                99-96/256    1.2556    -0.026
 Seven-year note               98-208/256   1.5559    -0.031
 10-year note                  97-156/256   1.766     -0.026
 30-year bond                  94-84/256    2.5216    -0.033
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        22.25        -0.75    
 spread                                               
 U.S. 3-year dollar swap        14.00         0.00    
 spread                                               
 U.S. 5-year dollar swap         1.50         0.50    
 spread                                               
 U.S. 10-year dollar swap      -17.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -56.50         0.00    
 spread                                               
 
    

 (Reporting by Richard Leong; Editing by Richard Chang)

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