December 18, 2017 / 8:41 PM / a year ago

TREASURIES-U.S. yield curve flattening takes breather

    * Profit-taking emerges on recent curve-flattening move
    * Flattening trend seen intact on rate hike, tax cut views
    * U.S. 2-year yield dips after hitting more than 9-year peak
    * U.S. home builder data come in stronger than forecast

 (Updates market action, adds quotes)
    By Richard Leong
    NEW YORK, Dec 18 (Reuters) - The margin between U.S.
shorter-dated and longer-dated Treasury yields widened on Monday
from its slimmest in a decade as traders booked profits on
curve-flattening positions tied to the view the Federal Reserve
would raise interest rates further.
    Expectations that inflation would remain tame and the
government would increase its short-term borrowing with the
possible passage of the Republican-backed tax cut bill had
supported traders favoring longer-dated Treasuries over
shorter-dated ones.
    "There is a bit of profit-taking on the recent big
flattening move," said Guy LeBas, chief fixed-income strategist
at Janney Montgomery Scott in Philadelphia.
    Last week, Fed policymakers signaled they expected the U.S.
central bank would hike rates three times in 2018, projecting a
short-term jump in economic growth from the Trump
administration's proposed tax cuts.  
    Top U.S. Republicans said on Sunday they anticipated
Congress would pass their tax overhaul plan this week.
Independent government analyses estimated the plan would tack on
at least $1 trillion to the $20 trillion in national debt.

    Analysts expected the Treasury Department would raise its
issuance of Treasury debt maturing out to five years to finance
an increase in the federal deficit from the tax proposal.
    A possible increase in Treasury supply, possibly in early
2018, spurred a rise in short- to medium-term yields early on
Monday. The yield increase on those maturities cooled as
profit-taking on curve flatteners emerged with a surge in stock
prices on Wall Street on optimism about the passage of the tax
    The three major U.S. stock indexes reached record highs.

    In late trading, the two-year Treasury yield was
down 0.8 basis point at 1.832 percent after hitting a nine-year
peak of 1.857 percent earlier. 
    The spread between five-year and 30-year yields
 hit 51.9 basis points, a level not seen since
October 2007, before steepening to 57.5 basis points. It ended
at 53.3 basis points on Friday, according to Tradeweb. 
    Despite Monday's curve steepening, the recent trend of curve
flattening appeared intact, analysts said.
    "The (steepening) move was fairly modest. Longer-term, we
expect the curve to continue flattening," said Justin
Hoogendoorn, head of fixed income strategy and analysis at Piper
Jaffray in Chicago.
    On the data front, the National Association of Home Builders
said its housing market index, which is seen as a proxy on home
construction, rose to 74 points in December, stronger than
forecast and above a revised 69 in November.
    Economists are monitoring whether the mild pickup in
mortgage rates in recent weeks has begun denting housing
activity. Reports on new and existing home sales will be
released later this week.
December 18 Monday 3:17PM New York / 2017 GMT
 US T BONDS MAR8               153-6/32     -1-3/32   
 10YR TNotes MAR8              124-60/256   -0-48/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.325        1.3477    0.031
 Six-month bills               1.45         1.4807    0.003
 Two-year note                 99-216/256   1.8318    -0.008
 Three-year note               99-204/256   1.9452    -0.003
 Five-year note                99-56/256    2.1673    0.010
 Seven-year note               98-220/256   2.3035    0.024
 10-year note                  98-188/256   2.3942    0.039
 30-year bond                  100-32/256   2.7438    0.055
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       56.00        4.70      
 30-year vs 5-year yield       57.60        4.35      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        20.00         1.50    
 U.S. 3-year dollar swap        17.75         1.75    
 U.S. 5-year dollar swap         4.75         0.50    
 U.S. 10-year dollar swap       -1.50        -0.25    
 U.S. 30-year dollar swap      -20.50        -0.50    

 (Reporting by Richard Leong; Editing by Jonathan Oatis and Paul
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