July 20, 2018 / 4:24 PM / in a year

TREASURIES-Yield curve steepens as Trump adds to Fed criticism

 (Recasts with longer-dated yields climbing on Trump rate
comments; adds analyst quote)
    By Kate Duguid
    NEW YORK, July 20 (Reuters) - Longer-dated U.S. government
bond yields moved higher on Friday, steepening the Treasury
yield curve, after President Donald Trump reiterated his
criticism of the Federal Reserve's pace of rate hikes, saying it
takes away from the United States' "big competitive edge" and
could hurt the U.S. economy. 
    Trump, in posts on Twitter, also lamented the strength of
the U.S. dollar and accused the European Union and China of
manipulating their currencies.
    Mounting fears that Trump's comments would encourage Fed
Chair Jerome Powell to slow the pace of hikes this year sent the
30-year Treasury bond yield up 6.3 basis points from
Thursday's close to a session high of 3.03 percent. 
    The yield on the benchmark 10-year note was last
at 2.89 percent, up 4.2 basis points from its 2.85 percent close
on Thursday. 
    The long end of the curve, which reflects sentiment about
rising inflation and the health of the economy, moved higher
while short-dated maturities held steady.
    "We have above full employment, and if Trump is successful
in getting the Fed to back off its rate hikes, that has the
potential to create an overheating economy and rising
inflation," said Mary Ann Hurley, vice president in fixed income
at D.A. Davidson in Seattle.
    Trump also criticized Fed policy in an interview on CNBC on
Thursday, after which Treasury yields fell across the board.

    At the short end of the curve, the two-year note
was unchanged from Thursday's close at 2.60 percent. That  
steepened the yield curve, a counter-trend to a months-long
flattening, driving the spread between two- and 10-year yields
 up 5.5 basis points from Thursday's close to a
session high of 29.8 basis points. The spread between five- and
30-year yields was up as much as 4.9 basis points
since Thursday. 
    In spite of the curve steepening, the futures market implied
traders' expectations the Federal Open Market Committee will
raise rates at its Sept. 26 meeting were unchanged, CME Group's
FedWatch program showed. The probability of a fourth rate hike
in December rose from 53.69 percent on Thursday to 56.13 percent
on Friday. 
    "Trump's comments have almost pushed Powell into having to
tighten in September. The Fed is one of the last independent
institutions out there and if Powell indicates he is letting the
administration control the Fed, the Fed is going to lose any
type of credibility," said Hurley.
    No significant U.S. economic data was published on Friday.
    July 20 Friday 11:56AM New York / 1556 GMT
 US T BONDS SEP8               144-13/32    -0-28/32  
 10YR TNotes SEP8              120-24/256   -0-52/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.9475       1.9839    -0.010
 Six-month bills               2.095        2.1463    -0.003
 Two-year note                 99-212/256   2.5911    -0.004
 Three-year note               99-222/256   2.6716    0.006
 Five-year note                99-100/256   2.7576    0.018
 Seven-year note               99-116/256   2.8372    0.027
 10-year note                  99-240/256   2.8821    0.035
 30-year bond                  102-20/256   3.0187    0.052
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        23.50         1.00    
 U.S. 3-year dollar swap        20.75         0.50    
 U.S. 5-year dollar swap        14.50         0.25    
 U.S. 10-year dollar swap        6.25        -0.25    
 U.S. 30-year dollar swap       -6.50        -1.50    

 (Reporting by Kate Duguid; Editing by Dan Grebler)
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