July 18, 2018 / 6:26 PM / a year ago

TREASURIES-U.S. yields near flat as Fed's Powell sticks to upbeat script

    * U.S. yield curve holds at flattest in over a decade
    * U.S. two-year yield holds below near 10-year peak
    * U.S. housing starts plunge to nine-month low in June 

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, July 18 (Reuters) - U.S. Treasury yields were
little changed on Wednesday with the yield curve remaining near
its flattest in nearly 11 years as  Federal Reserve Chairman
Jerome Powell stayed on message about a healthy economy before a
House of Representatives committee.
    Powell's appearance was the second half of his semiannual
testimony before Congress. 
    "He's been constructive on the economy and downplayed the
risk of a recession," said Jonathan Cohn, interest rate
strategist with Credit Suisse in New York.
    Powell's answers to questions from members of the House
Financial Services Committee struck a chord similar to the one
he sounded before the Senate Banking Committee on Tuesday. His
message supported traders' expectations that the U.S. central
bank would increase key overnight borrowing costs two more times
in 2018.
    The futures market implied traders saw an 92 percent chance
the Fed would increase its target range on key interest rates by
a quarter point, to between 2.00 percent and 2.25 percent, at
its Sept. 25-26 policy meeting, CME Group's FedWatch
program showed.
    It suggested traders priced in a 63 percent likelihood of
another rate hike at the Fed's Dec. 18-19 policy meeting.
    Powell acknowledged the risk from the trade friction between
the United States and its major trade partners. 
    "If this process leads to a world of higher tariffs on a
wide range of goods and services that are traded and those are
sustained for a longer period of time, if it results in a more
protectionist world, that would be bad for our economy," he
    The possibility of further rate increases pinned the
two-year yield near its highest since August 2008. It
was last 2.611 percent, down 0.4 basis point from late on
    The spread between two-year and 10-year Treasury yields
 was 25.40 basis points after touching 23.40 basis
points earlier Wednesday, which was its tightest since July
    Analysts and traders are worried about the yield curve
inverting, or when shorter-dated yields are higher than
longer-dated ones. An inverted yield curve is seen as a reliable
sign of U.S. recession, although Powell downplayed the
flattening yield curve as an omen of slower growth.
    The yield on the 10-year Treasury was up nearly
1 basis point on the day at 2.871 percent.
    Treasury yields hit session lows earlier, following a
government report that domestic housing starts fell to a
nine-month low in June on rising costs and land shortage.
July 18 Wednesday 2:11 PM New York / 1811 GMT
 US T BONDS SEP8               144-26/32    -7/32     
 10YR TNotes SEP8              120-20/256   -2/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.97         2.0074    -0.011
 Six-month bills               2.115        2.1676    -0.018
 Two-year note                 99-202/256   2.6113    -0.004
 Three-year note               99-208/256   2.6906    0.003
 Five-year note                99-90/256    2.7659    0.004
 Seven-year note               99-120/256   2.8346    0.004
 10-year note                  100-8/256    2.871     0.009
 30-year bond                  102-196/256  2.9842    0.014
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       25.40        1.30      
 30-year vs 5-year yield       21.60        1.10      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        22.25         0.50    
 U.S. 3-year dollar swap        19.75         0.00    
 U.S. 5-year dollar swap        13.75         0.00    
 U.S. 10-year dollar swap        6.50         0.25    
 U.S. 30-year dollar swap       -5.00        -0.25    

 (Reporting by Richard Leong; Editing by Steve Orlofsky)
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