October 22, 2018 / 6:47 PM / 10 months ago

TREASURIES-Prices gain as stocks fall, inflation concerns cap rally

(Recasts with long-dated Treasuries, adds quotes, updates prices)

* Weak stock markets adds bid for Treasuries

* Two- and 10-year yield curve flattest since Oct. 3

* Treasury to sell $108 billion in short and intermediate notes this week

By Karen Brettell

NEW YORK, Oct 22 (Reuters) - Longer-dated U.S. Treasury prices edged higher on Monday as falling stocks boosted demand for low risk debt, though gains were limited as investors remained on edge with rising inflation pressures and further potential interest rate hikes by the Federal Reserve.

The S&P 500 and Dow Jones Industrial Average fell on Monday as early gains tracking a rally in China market faded, with oil and financial stocks pushing the indexes lower.

That was “providing a little support” to bonds, said Mary Ann Hurley, vice president in fixed income trading at D.A. Davidson in Seattle.

However, “Treasuries seem to be concerned about potentially building inflationary pressures and the Fed continuing to tighten,” Hurley added.

Benchmark 10-year yields rose 3/32 in price to yield 3.19 percent, down from 3.20 percent on Friday. They are holding below a seven-year high of 3.26 percent reached on Oct. 9.

Next week’s employment report for October will be watched for further indications of rising wage pressures.

Annual wage gains dipped to 2.8 percent in September from 2.9 percent in August, which was the biggest advance in more than nine years, though some economists view wage growth as understated, based on anecdotal evidence that worker shortages is forcing companies to raise compensation.

This week’s economic focus is Friday’s reading of gross domestic product for the third quarter.

Two-year note yields rose to their highest level in a decade earlier on Monday and the U.S. Treasury yield curve was the flattest in more than two weeks ahead of $108 billion in short- and intermediate-dated supply.

The Treasury Department will auction $38 billion in two-year notes on Tuesday, $39 billion in five-year notes on Wednesday and $31 billion in seven-year notes on Thursday.

At higher yields, the debt should be attractive, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

Wall Street dealers have been absorbing increases in Treasury supply in recent auctions as foreigners reduce purchases.

Lyngen also noted solid demand from bank portfolio managers and mutual funds.

“We’ve seen domestic purchasers step up,” Lyngen said. “I think overall the actions will be reasonably well received as long as we have some type of typical concession.” (Reporting by Karen Brettell; Editing by Will Dunham and Richard Chang) )

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