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TREASURIES-U.S. bond yields fall with gilts, moderating inflation trend
October 18, 2016 / 7:01 PM / in a year

TREASURIES-U.S. bond yields fall with gilts, moderating inflation trend

* Challenge on "hard Brexit" stokes buying on UK government
debt
    * U.S. core CPI rises 0.1 pct, less than forecast
    * Dealers sell Treasuries to hedge large Saudi bond issue

 (Recasts with updated market action; adds quote)
    By Richard Leong
    NEW YORK, Oct 18 (Reuters) - U.S. Treasury yields fell on
Tuesday in line with their U.K. counterparts on chances that
parliament may have to ratify a British exit from the European
Union, which reduced some bets that the U.K. would lose access
to the single market.
    U.S. bond yields pulled further away from four-month peaks
set on Monday on data that showed the underlying inflation trend
moderated in September. This revived expectations it may take
longer than previously thought for domestic inflation to reach
the Federal Reserve's 2 percent goal, keeping the Fed on a
glacial path on raising interest rates. 
 
    "The initial strength came from gilts," said Jim Vogel,
interest rates strategist at FTN Financial in Memphis,
Tennessee. "The inflation trade which has come in bursts has
cooled a bit," he added.
    A lawyer who represents the U.K. government in its challenge
over who has the right to trigger Brexit divorce talks, James
Eadie, said parliament would "very likely" have to ratify any
Brexit agreement. This runs counter to Prime Minister Theresa
May's hard line for a rapid exit from the EU. 
    A hard Brexit is seen among some investors as harmful to the
British economy, making gilts less attractive.
    Uncertainty on how London's High Court may rule stoked some
buying of U.K. government debt with 10-year yields falling over
4 basis points to 1.077 percent. 
    Benchmark U.S. 10-year Treasury notes were last
up 4/32 in price for a yield of 1.750 percent, down 1.6 basis
points and not far below a four-month peak of 1.841 percent
reached on Monday.        
    Treasury yields briefly rose earlier on Tuesday as dealers
sold government bonds to hedge a large global bond issue from
Saudi Arabia that they are underwriting.
    Saudi Arabia planned to sell a multi-part bond issue worth
$10 billion to $15 billion, according to IFR, a Thomson Reuters
unit. 
    Bond dealers typically sell Treasuries to hedge against a
deal they underwrite and then buy them back after the deal is
sold. 
    The U.S. Labor Department said on Tuesday the Consumer Price
Index, its broadest inflation gauge, rose 0.3 percent in
September, matching the median forecast among analysts polled by
Reuters.
    However, the CPI core rate, which excludes volatile food and
energy prices, edged up 0.1 percent in September, falling short
of an expected 0.2 percent increase. 
    
  Tuesday, Oct. 18 at 1437 EDT (1837 GMT): 
                               Price                  
 US T BONDS DEC6               164-9/32     0-11/32   
 10YR TNotes DEC6              130-80/256   0-48/256  
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.3425       0.3476    0.000
 Six-month bills               0.4725       0.4802    0.002
 Two-year note                 99-230/256   0.8026    -0.020
 Three-year note               100-30/256   0.9601    -0.021
 Five-year note                99-124/256   1.2327    -0.023
 Seven-year note               98-248/256   1.532     -0.024
 10-year note                  97-196/256   1.7485    -0.018
 30-year bond                  94-120/256   2.5147    -0.008
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        22.50         0.50    
 spread                                               
 U.S. 3-year dollar swap        14.00         0.25    
 spread                                               
 U.S. 5-year dollar swap         1.75         0.25    
 spread                                               
 U.S. 10-year dollar swap      -17.00         0.00    
 spread                                               
 U.S. 30-year dollar swap      -56.75        -0.25    
 spread                                               
 
    

 (Reporting by Richard Leong; Editing by Nick Zieminski and
Leslie Adler)

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