June 13, 2018 / 6:44 PM / in 3 months

TREASURIES-U.S. yields rise after Fed signals two more hikes this year

    * Fed raises rates, signals more hikes; yields up
    * U.S. yield curve flattens further
    * Yields on 2-year notes rise to 3-week high

    By Gertrude Chavez-Dreyfuss
    NEW YORK, June 13 (Reuters) - U.S. Treasury yields advanced
on Wednesday after the Federal Reserve raised interest rates as
expected, and signaled two more hikes this year, citing higher
inflation.
    U.S. two-year yields, the maturity most sensitive to rate
hike expectations, touched three-week highs, while those of
10-year notes rose to a one-week peak.
    The Fed raised its benchmark overnight lending rate a
quarter of a percentage point to a range of between 1.75 percent
and 2 percent, and dropped its pledge to keep rates low enough
to stimulate the economy "for some time."
    Policymakers also projected a slightly faster pace of rate
increases in the coming months, with two additional hikes
expected by the end of this year, compared to one previously.
    The yield curve flattened further after the Fed decision.
    The yield spread between U.S. 30-year bonds and U.S. 5-year
notes narrowed to a low of 24.4 basis points, the
flattest level since January 2012.
    Another yield curve measure showed that the gap between U.S.
10-year and U.S. two-year note yields compressed further to 39.1
basis points, the tightest since at least March 2010, according
to Reuters data.
    A flat yield curve suggested expectations of U.S. interest
rate increases that have boosted the short end.
    "Notably with their latest economic projections, there are
upgrades across the board in growth, inflation and employment,"
said Bill Northey, senior vice president, at U.S. Bank Wealth
Management in Helena, Montana.
    "You have short-rates pushing up a bit and equity softening
up with the likelihood of a fourth rate hike this year. This is
not a total surprise," he added.
    In afternoon trading, U.S. 10-year yields rose to 2.988
percent, a one-week high, after the Fed rate hike,
from Tuesday's 2.957 percent.
    U.S. 30-year yields were up at 3.106 percent,
compared with 3.092 late Tuesday.
    On the short end of the curve, U.S. two-year yields rose to
three-week highs of 2.594 percent, from 2.541 percent
on Tuesday. They were last at 2.581 percent.
    Earlier, higher-than-expected U.S. producer prices in May
had little impact on Treasuries, but it further flattened the
yield curve.
    Data released on Wednesday showed that U.S. producer prices
increased more than expected in May, leading to the biggest
annual gain in nearly 6-1/2 years, but underlying producer
inflation remained moderate.
    "The PPI story has always struck us as more one about
corporate profit compression than true inflation pass-through,
at least in the current environment," said Ian Lyngen, head of
U.S. rates strategy at BMO Capital Markets in New York.
    "As we've noted in the past, the curve flattening trade
begins and ends with the Fed." 
    
      June 13 Wednesday 2:27PM New York / 1827 GMT
                               Price                  
 US T BONDS SEP8               142-13/32    -0-16/32  
 10YR TNotes SEP8              119-28/256   -0-76/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.9          1.9357    0.003
 Six-month bills               2.04         2.0899    -0.002
 Two-year note                 99-214/256   2.586     0.045
 Three-year note               99-188/256   2.7178    0.047
 Five-year note                99-136/256   2.8518    0.044
 Seven-year note               99-132/256   2.9524    0.042
 10-year note                  99-4/256     2.9903    0.033
 30-year bond                  100-68/256   3.1112    0.019
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        26.25        -0.25    
 spread                                               
 U.S. 3-year dollar swap        22.00         0.25    
 spread                                               
 U.S. 5-year dollar swap        14.00         0.00    
 spread                                               
 U.S. 10-year dollar swap        6.00         0.00    
 spread                                               
 U.S. 30-year dollar swap       -5.75         0.25    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by
Richard Leong; Editing by Nick Zieminski and Richard Chang)
  
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