September 26, 2018 / 8:39 PM / a year ago

TREASURIES-U.S. yield curve flattens as Fed signals more rate rises

    * Fed as expected raises interest rates for third time in
    * Fed's Powell says Fed does see upside inflation surprise 
    * Fed officials upgrades growth view, sticks to rate outlook
    * Longer-dated U.S. yields retreat from 4-month highs

 (Updates throughout, adds quotes)
    By Richard Leong
    NEW YORK, Sept 26 (Reuters) - U.S. Treasury yields fell on
Wednesday with the yield curve hitting its flattest levels in
over a week as the Federal Reserve signaled it would remain a
gradual rate-hike path in response to solid economic growth.
    Longer-dated yields led the bond market in the wake of Fed
Chairman Jerome Powell's inflation comment at his press
conference after the central bank's two-day policy.
    "His statements on the economy at the press conference was
pretty bullish," said Dec Mullarkey, managing director of
investment strategies at Sun Life Investment Management in
Wellesley, Massachusetts. "On the inflation front, he saw things
as pretty contained."
    Powell said the central bank did not see inflation, which by
various measures are now near or above its 2.0-percent goal,
surprising on the upside.
    Before the Fed's latest rate rise and economic forecasts,
some traders had bet policy-makers may hint at a faster pace of
rate increases as a result of the pickup in business activity
stemming from the massive tax cut enacted last December.

    While the Fed officials on balance did not alter their
rate-hike stance, they removed the term "accommodative" from
their latest policy statement.
    "The Fed does not want to communicate they are ‘dovish’,
rather, they want to unshackle themselves from the word
‘accommodative’ so they can freely adjust policy based on data,"
said Jim Caron, portfolio manager at Morgan Stanley Investment
Management in New York.
    Benchmark 10-year Treasury yield ended at 3.050
percent, down 5 basis points on the day. On Tuesday, it reached
3.113 percent, its highest since May, Reuters data showed.
    The 30-year yield was over 5 basis points lower
at 3.180 percent after hitting a four-month peak of 3.249
percent on Tuesday.
    Two-year yields slipped more than 2 basis points
to 2.819 percent after touching 2.847 percent on Tuesday, which
was last seen in June 2008.
    The spread between two-year and 10-year yields
 shrank to less than 23 basis points, the tightest
level in a over week.
    The futures market implied traders saw a 79 percent chance
of a rate increase at the Fed's Dec. 18-19 policy meeting, down
from 81 percent late on Tuesday, CME Group's FedWatch
program showed.
    Looking ahead, the U.S. Treasury Department will complete on
Thursday this week's sales of government debt with a $31 billion
auction of seven-year notes.
    Earlier this week, sales of two-year and five-year
Treasuries fetched poor demand on investors' caution before the
Fed's latest rate move.
September 26 Wednesday 4:29PM New York / 2029 GMT
 US T BONDS DEC8               140-22/32    29/32     
 10YR TNotes DEC8              118-216/256  13/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.16         2.202     -0.013
 Six-month bills               2.31         2.3698    -0.010
 Two-year note                 99-222/256   2.8188    -0.024
 Three-year note               99-162/256   2.8798    -0.036
 Five-year note                99-172/256   2.9461    -0.048
 Seven-year note               98-100/256   3.009     -0.051
 10-year note                  98-132/256   3.0499    -0.052
 30-year bond                  96-124/256   3.1831    -0.050
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       22.90        -2.40     
 30-year vs 5-year yield       23.60        -0.70     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        17.00         0.75    
 U.S. 3-year dollar swap        17.00         1.00    
 U.S. 5-year dollar swap        12.00         0.00    
 U.S. 10-year dollar swap        6.00         0.75    
 U.S. 30-year dollar swap       -6.75         0.50    

 (Reporting by Richard Leong; Editing by Clive McKeef)
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