July 17, 2018 / 6:47 PM / 2 months ago

TREASURIES-Fed's Powell upbeat view flattens U.S. yield curve

    * U.S. yield curve retests flattest level in over a decade
    * U.S. two-year yield climbs to highest in nearly 10 years
    * Fed's Powell sees more jobs growth, tame inflation  
    * Futures imply traders see 89 pct chance of Sept rate hike

 (Recasts lead, updates market action, adds quote)
    By Richard Leong
    NEW YORK, July 17 (Reuters) - The U.S. two-year Treasury
yield rose on Tuesday to its highest level in nearly a decade,
with the yield curve at its flattest in nearly 11 years, as
Federal Reserve Chairman Jerome Powell's upbeat remarks on the
economy supported traders' view of more rate hikes.
    Powell, in testimony about the economy and monetary policy
before a Senate panel, said: "With appropriate monetary policy,
the job market will remain strong and inflation will stay near 2
percent over the next several years."
    Powell downplayed the current friction between the Trump
administration and major U.S. trade partners as a risk to 
business and consumer activities.
    "The move is just short-term yields leaking higher as the
market is pricing in more Treasury bill supply and more rate
hikes," said Justin Lederer, Treasury strategist at Cantor
Fitzgerald in New York. "The market is quite content with where
long-term yields are."
    The spread between two-year and 10-year Treasury yields
 was 24.10 basis points, hovering at its tightest
level since July 2007.
    Interest rates futures implied traders saw about an
89-percent chance the Fed would lift 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.
    They suggested traders priced in about a 63-percent
likelihood of another rate hike at the Fed's Dec. 18-19 policy
meeting.   
    Signs of a slight pick-up in business and consumer
activities in the second quarter had stoked bets the Fed may
consider a faster pace of rate hikes. But the consensus view
remained that the Fed would refrain from turning more aggressive
on hiking rates to avert inverting the yield curve.
    "Right now, with the Fed’s gradual rate increases, he will
continue with that approach," said Paula Solanes, portfolio
manager at SVB Asset Management in San Francisco. 
    An inverted yield curve, in which short-dated Treasury
yields rise above long-dated ones, has preceded the past five
U.S. recessions.  
    After his appearance in front of the Senate Banking
Committee, Powell will complete his semiannual testimony before
the House Financial Services Committee at 10 a.m. (1400 GMT) on
Wednesday.
    On light trading volume, the yield on benchmark 10-year
Treasury notes was 2.860 percent, up 0.4 basis point
from Monday.
    The two-year yield, which is most sensitive to
traders' views on changes in Fed policy, hit 2.615 percent, the
highest since August 2008, according to Reuters data.
     
July 17 Tuesday 2:33PM New York / 1833 GMT
                               Price                  
 US T BONDS SEP8               145-3/32     -1/32     
 10YR TNotes SEP8              120-32/256   -2/32     
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.98         2.0177    0.037
 Six-month bills               2.1325       2.1857    0.027
 Two-year note                 99-200/256   2.6153    0.012
 Three-year note               99-210/256   2.6879    0.011
 Five-year note                99-94/256    2.7625    0.010
 Seven-year note               99-128/256   2.8296    0.005
 10-year note                  100-28/256   2.8619    0.006
 30-year bond                  103-16/256   2.9694    0.003
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       24.50        -1.40     
 30-year vs 5-year yield       20.70        -0.15     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        22.00        -0.50    
 spread                                               
 U.S. 3-year dollar swap        20.00         0.25    
 spread                                               
 U.S. 5-year dollar swap        13.50         0.00    
 spread                                               
 U.S. 10-year dollar swap        6.25         0.25    
 spread                                               
 U.S. 30-year dollar swap       -4.50         0.25    
 spread                                               
 
    

    
 (Reporting by Richard Leong
Editing by Dan Grebler and Nick Zieminski)
  
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