January 31, 2018 / 9:37 PM / 10 months ago

TREASURIES-Borrowing plan, Fed signal on rate hikes flattens U.S. yield curve

    * Fed hints of further rate hikes on expected inflation
pickup
    * U.S. leans on short-dated debt to fund growing deficit
    * ADP data shows further improvement in U.S. labor market
    * Global bond markets suffer worst month in over a year

 (Updates market action, adds quotes)
    By Richard Leong
    NEW YORK, Jan 31 (Reuters) - The spread between longer-dated
U.S. Treasury yields and short-dated ones contracted to the
slimmest in over a decade on Wednesday as the government favored
selling more short-dated debt than longer-dated issues to
finance the projected rise in its budget deficit.
    The yield curve also flattened as the Federal Reserve
bolstered the notion it would raise key borrowing costs at least
three times in 2018 on an expected pickup in inflation.
    "We are big advocates of the flattener trade," said Mark
Lindbloom, portfolio manager at Western Asset Management Co. in
Pasadena, California with $442 billion in assets.
    The yield curve has further room to flatten longer term with
intermittent bouts of steepening, Lindbloom said.
    Month-end purchases of longer-dated Treasuries was another
factor that flattened the yield curve as investors reallocated
money into bonds from stocks after the S&P 500 index
recorded its best month since March 2016.
    On the other hand, Treasuries have lost about
1.4 percent in January, marking their worst monthly performance
since November 2016, according to an index compiled by Bloomberg
and Barclays.
    Other bond markets also sustained the steepest losses in
more than a year.
    Longer-dated Treasury yields initially rose on Wednesday
when the government said it will increase the monthly auction
size of 10-year and 30-year debt. They quickly retreated when
traders focused on faster increases in two-year and three-year
maturities versus the rise in longer-dated supply. 

    "They were more aggressive on the front-end than what people
had expected," said Tom Simons, money market strategist at
Jefferies & Co. in New York.
    A Washington think tank estimated the federal budget gap
would surpass $1 trillion in 2019 and may hit $2 trillion in
2027 stemming from late December's massive tax overhaul.
    
    The spread between five-year and 30-year Treasury yields
shrank to near 41 basis points, a level not seen since August
2007, before finishing at 42 basis points in late trading,
according to Tradeweb.
    Benchmark 10-year Treasury yields were little
changed on the day at 2.726 percent after reaching a near
four-year peak at 2.754 percent.
    The five-year yield reached 2.553 percent, the
highest since April 2010, while the two-year yield
touched 2.165 percent, the highest since September 2008.
    On the data front, ADP Research Institute said U.S.
companies hired 234,000 workers in January, more than the
185,000 projected by economists polled by Reuters. The latest
ADP data reinforced the view of a labor market at or near full
employment which would support the Fed raising rates in March,
analysts said.
    Wednesday, Jan. 31 at 1604 EST (2104 GMT):
                               Price                    
 US T BONDS MAR8               147-23/32    0-11/32     
 10YR TNotes MAR8              121-148/256  -0-16/256   
                               Price        Current     Net
                                            Yield       Change
                                            (pct)       (bps)
 Three-month bills             1.4375       1.4628      0.003
 Six-month bills               1.625        1.6612      -0.003
 Two-year note                 99-182/256   2.1486      0.025
 Three-year note               99-44/256    2.2915      0.034
 Five-year note                99-76/256    2.5256      0.019
 Seven-year note               98-248/256   2.6625      0.007
 10-year note                  95-248/256   2.7219      -0.003
 30-year bond                  96-8/256     2.9511      -0.029
                                                        
   DOLLAR SWAP SPREADS                                  
                               Last (bps)   Net Change  
                                            (bps)       
 U.S. 2-year dollar swap        18.75        -0.25      
 spread                                                 
 U.S. 3-year dollar swap        18.00        -0.75      
 spread                                                 
 U.S. 5-year dollar swap         7.25         0.25      
 spread                                                 
 U.S. 10-year dollar swap        2.75         1.00      
 spread                                                 
 U.S. 30-year dollar swap      -12.75         2.25      
 spread                                                 
 

    
 (Reporting by Richard Leong; Editing by Frances Kerry and Chris
Reese)
  
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