October 20, 2017 / 1:46 PM / a year ago

TREASURIES-U.S. bond yields jump after Senate approves budget plan

    * Investors dump bonds as Senate vote raises tax-cut hopes
    * U.S. 2-year yield near 9-year peak, 10-year 2-week high
    * Bond buys on centrist Fed chief nominee fade to background
    * Brexit, Catalonia worries limit yield rise before weekend

    By Richard Leong
    NEW YORK, Oct 20 (Reuters) - U.S. Treasury yields rose on
Friday, with two-year yields reaching a near nine-year high, as
investors reduced bond holdings on worries about more inflation
and federal borrowing after the U.S. Senate passed a budget
    The move late Thursday raised expectations the
Republican-controlled Congress and U.S. President Donald Trump
would be able to enact their tax-cut package, which would widen
the federal deficit by up to $1.5 trillion over the next decade.

    Fears over further federal borrowing to fund the tax cuts
and a possible pickup in inflation as a result reversed a late
Thursday rally in the bond market in reaction to a report that 
Trump is leaning towards a Federal Reserve chair nominee who is
seen as unlikely to change the Fed's current easy policy stance.
    "There is some momentum selling ahead of these possible tax
cuts so that's weighing on Treasuries," said Larry Milstein,
head of government and agency trading at R.W. Pressprich & Co.
in New York.
    The yield on 10-year Treasury notes reached a
two-week peak of 2.374 percent. At 9:27 a.m. (1327 GMT), it was
2.383 percent, up 6 basis points, putting it on track for its
biggest weekly rise in five weeks, according to Reuters data.
    The two-year yield touched a near nine-year peak
at 1.576 percent on bets for faster economic growth due to the
tax-cut plan, allowing the Fed to raise interest rates further.
    The rise in yields was capped by worries about the
negotiation between Britain and European Union officials for the
former to leave the trade bloc. Anxiety about the Spanish
government's handling of Catalonia's push to secede also limited
some selling in safe-haven U.S. government debt.

    Bond yields reversed their drop late Thursday in reaction to
a Politico report, citing three administration officials, saying
 Trump showed preference for current Fed Governor Jerome Powell
Powell as the next Fed chair.
    Powell is seen as likely to stick with the Fed's gradual
rate hike path and to loosen financial regulations.
    Traders have been speculating on Trump's possible picks for
Fed chief: Powell; current Fed Chair Janet Yellen; his chief
economic adviser, Gary Cohn; former Fed Governor Kevin Warsh and
Stanford University economist John Taylor.
    Trump is expected to announce his nominee in the coming
    "We expect that there will be a change but we don't know in
which direction," Milstein said. "Powell is middle of the road."
  October 20 Friday 9:28AM New York / 1328 GMT
 US T BONDS DEC7               152-4/32     -1-13/32  
 10YR TNotes DEC7              124-212/256  -0-112/2  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.0825       1.1004    0.007
 Six-month bills               1.235        1.2598    0.003
 Two-year note                 99-158/256   1.5763    0.021
 Three-year note               99-190/256   1.7141    0.024
 Five-year note                99-86/256    2.0169    0.042
 Seven-year note               99-84/256    2.23      0.055
 10-year note                  98-216/256   2.3827    0.062
 30-year bond                  97-20/256    2.8969    0.069
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        23.75        -0.50    
 U.S. 3-year dollar swap        22.25         0.00    
 U.S. 5-year dollar swap         7.75        -0.50    
 U.S. 10-year dollar swap       -2.75        -0.25    
 U.S. 30-year dollar swap      -30.75        -0.50    

 (Editing by Bernadette Baum)
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