May 10, 2018 / 8:30 PM / 9 months ago

TREASURIES-Long-dated yields fall, curve flattens after muted inflation data

 (Updates yields; adds analyst comments, auction results)
    By Kate Duguid
    NEW YORK, May 10 (Reuters) - Longer-dated U.S. Treasury
yields fell on Thursday, flattening the yield curve as a
smaller-than-expected increase in the consumer price index in
April reduced fears that domestic inflation is picking up steam
as the labor market tightens.
    The 10-year Treasury yield fell to a session low
of 2.948 percent after having broken through the psychologically
significant level of 3 percent on Wednesday.
    The two-year yield, which is particularly
sensitive to market sentiment about interest-rate hikes, was up
from late Wednesday, suggesting traders did not believe CPI data
was sufficiently weak to derail the planned rate hike in June.
    "I think June is pretty much 100 percent baked in and so
that's what we're seeing particularly in the short term," said
Paula Solanes, portfolio manager at Silicon Valley Bank Asset
Management in San Francisco.
    The overall effect was a flattening of the yield curve, in
which shorter-dated yields rise faster than those at the long
end. The spread between five- and 30-year yields
fell to a session low of 28.3 basis points, near the
post-financial crisis trough reached on April 30. 
    The Labor Department reported its consumer price index rose
0.2 percent in April after slipping 0.1 percent in March.
Excluding the volatile food and energy components, the CPI edged
up 0.1 percent after two straight monthly increases of 0.2
percent. The so-called core CPI rose 2.1 percent year-on-year in
April, matching March's increase.
    Core inflation remains low because wages have not risen
substantially even with jobless claims near a 48-year low. Real
average hourly earnings were flat in April, and rose just 0.2
percent year over year, the Labor Department also reported on
    Some analysts remained nonplussed. "We think this is a
temporary aberration," said Candice Bangsund, vice president and
portfolio manager, global asset allocation at Fiera Capital
Corporation in Montreal. "At a time when the economy is
operating at full employment, this will inevitably place upward
pressure on wages." 
    Also pressuring the long end of the curve was the strong
demand for $17 billion of new supply of 30-year bonds
 auctioned on Thursday afternoon. The bonds sold at a
yield of 3.130 percent, the highest for this maturity at an
auction since March 2017, Treasury data showed.
    The yield on benchmark 10-year Treasury notes was 2.970
percent, down 3.4 basis points from late Wednesday. The 30-year
yield was 3.119 percent, down 3.5 basis points, while the
two-year yield was last at 2.534 percent, less than a
basis point above late Wednesday.
      May 10 Thursday 3:55PM New York / 1955 GMT
 US T BONDS JUN8               143-6/32     0-17/32   
 10YR TNotes JUN8              119-100/256  0-32/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.86         1.8946    0.010
 Six-month bills               2.0025       2.051     -0.010
 Two-year note                 99-178/256   2.5343    0.004
 Three-year note               99-212/256   2.685     0.000
 Five-year note                99-160/256   2.8313    -0.007
 Seven-year note               99-152/256   2.9398    -0.017
 10-year note                  99-48/256    2.9695    -0.025
 30-year bond                  97-188/256   3.1172    -0.037
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        24.25        -0.50    
 U.S. 3-year dollar swap        19.00        -0.75    
 U.S. 5-year dollar swap        11.00        -0.50    
 U.S. 10-year dollar swap        4.25         1.50    
 U.S. 30-year dollar swap       -8.75         1.75    

 (Reporting by Kate Duguid and Richard Leong; Editing by David
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