March 13, 2018 / 7:34 PM / a year ago

TREASURIES-Yield curve flattens as demand depresses long end

    * Yield curve flattens on strong demand for 30-year bonds
    * Spread between five- and 30-year bonds lowest in a month
    * CPI growth slowed in Feb., in line with expectations 

 (Updates market action, adds quote, chart)
    By Kate Duguid
    NEW YORK, March 13 (Reuters) - The U.S. yield curve
flattened on Tuesday as longer-dated bonds fell on strong demand
for 30-year securities at auction, and on earlier news that
February consumer price data cooled, suggesting the anticipated
pickup in inflation is likely to be gradual. 
    The spread between the five-year note and the
30-year bond fell to its lowest level since Feb. 2.
The strength of the 30-year reopening in spite of the $1 billion
increase in supply suggests firm demand for long-dated bonds,
and spurred additional bond buying in the open market. 
    Though the five-year note's yield initially fell
on news earlier on Tuesday that U.S. inflation had slowed in
February in line with expectations, it soon retraced those
losses as the market digested the data. 
    "The strength of the 30-year auction despite a persistent
rally speaks to the depth of demand for the long bond and
reinforces our own conviction that the fives/30s curve will
continue to flatten," said Aaron Kohli, interest rate strategist
at BMO Capital Markets in New York. 
    Large investment funds, bond dealers and other direct
bidders snapped up $13 billion of U.S. 30-year Treasury bond
supply on Tuesday. Direct bidders took 14.75 percent of the
supply, their largest share at a 30-year bond auction since
October 2015.
    The high yield reached during the auction was 3.109 percent,
below the expected 3.115 percent, another indicator of strong
demand from investors.
    "I think that without a significant threat that 10s will
leap toward the 2.90s this week; 30s have started to look a bit
cheaper. There’s less downside price risk in longer Treasuries,"
said Jim Vogel, interest rate strategist at FTN Financial in
Chicago, Illinois.   
    The Labor Department reported that its Consumer Price Index
rose 0.2 percent last month, in line with expectations, but had
slowed compared with its 0.5 percent jump in January. January's
surge in inflation cemented investors' expectation of an
interest rate hike in March and increased the possibility of a
fourth hike in 2018.
    Although February's data was in line with expectations, it
reduced the possibility of a fourth rate hike this year, with
Fed funds futures data showing investor expectations fell from
28 percent before the release to 25 percent following it.

    The 30-year bond yield was last trading at 3.099
percent, down 3 basis points from Monday's close. The yield on
the benchmark 10-year Treasury note was 2.844
percent, down from 2.870 percent at last close. The five-year
note, was down 1 basis point to 2.625 percent.
      March 13 Tuesday 3:00PM New York / 1900 GMT
 US T BONDS JUN8               144-4/32     0-13/32   
 10YR TNotes JUN8              120-84/256   0-32/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.695        1.726     0.044
 Six-month bills               1.865        1.909     0.034
 Two-year note                 99-250/256   2.262     -0.004
 Three-year note               99-222/256   2.4212    -0.013
 Five-year note                99-250/256   2.6299    -0.005
 Seven-year note               99-208/256   2.7797    -0.012
 10-year note                  99-40/256    2.848     -0.022
 30-year bond                  98-8/256     3.1014    -0.028
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        32.25         0.75    
 U.S. 3-year dollar swap        27.25         0.50    
 U.S. 5-year dollar swap        15.50         0.75    
 U.S. 10-year dollar swap        4.50         1.25    
 U.S. 30-year dollar swap      -14.00         1.50    


 (Reporting by Kate Duguid; Jonathan Oatis and Dan Grebler)
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