August 24, 2018 / 6:21 PM / 8 months ago

TREASURIES-U.S. yield curve flattest since 2007 as Fed's Powell affirms more rate hikes

(Recasts with yield curve, adds quote, updates prices)

* Powell defends rate increases

* Heavy short positioning seen helping bonds rally

* Probe into former Trump lawyer sparks concerns

By Karen Brettell

NEW YORK, Aug 24 (Reuters) - The Treasury yield curve reached its flattest level since 2007 on Friday as comments by Federal Reserve Chairman Jerome Powell affirmed expectations that the U.S. central bank will continue raising rates.

The Fed’s steady interest rate hikes are the best way to protect the U.S. economic recovery and keep job growth as strong as possible and inflation under control, Powell said at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming.

It came after U.S. President Donald Trump on Monday criticized rate increases, saying the Fed Chairman should do more to help him to boost the economy.

The yield curve between two-year and 10-year notes has flattened to 19 basis points, from 33 basis points at the beginning of August and 83 basis points in February, as investors price rate hikes into shorter-dated notes.

Long-dated bonds are meanwhile being supported by restrained inflation and demand by foreign central banks that are continuing bond purchase programs.

“The Fed’s gradually removing accommodation, meanwhile inflation remains relatively subdued, so that puts a clear pivot into the curve,” said Blake Gwinn, an interest rate strategist at NatWest Markets in Stamford, Connecticut.

Interest rate futures traders are pricing in a 98-percent chance of a rate hike at the Fed’s September meeting, and a 68 percent chance of an additional hike in December, according to the CME Group’s FedWatch Tool.

Extreme short positioning in long-dated Treasuries, with many investors betting that yields are likely to increase, has also made it difficult for the yields to rise without fresh impetus.

“Treasuries have returned to the lower end of their recent (yield) ranges and I think that speaks to the heavy short positioning, suggesting that it’s easier for the market to rally than it is to sell off,” said Jonathan Cohn, an interest rate strategist at Credit Suisse in New York.

Treasuries have also been supported this week by safety buying as investors consider the impact of legal woes for two former Trump advisers.

Federal prosecutors have granted immunity to Trump Organization chief financial officer Allen Weisselberg in a probe involving Trump’s former personal lawyer Michael Cohen, the Wall Street Journal reported on Friday.

Cohen pleaded guilty to eight criminal charges, including campaign finance violations, on Tuesday while former campaign manager Paul Manafort was convicted on charges of tax and bank fraud.

Editing by Susan Thomas and Chizu Nomiyama

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