Longer dated yields hold 2-week highs


U.S. Treasuries yields rose on Thursday as Wall Street stock prices rose a day after U.S. Federal Reserve's signal that it might raise interest rates in 2015 but would do so at a gradual pace. Most U.S. government yields touched one-week highs as some traders exited earlier curve flattener positions that were based on the view the U.S. central bank would raise short-term rates even as domestic growth remains subpar and inflation falls short of its 2 percent goal next year.

"The Fed used soft language that the market would take comfort in, especially equities," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas City.

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The benchmark 10-year note yield was 2.209 percent, up 6 basis points from late on Wednesday and on track for its largest two-day jump since June. The yield spreads between short- and long-dated Treasuries grew as traders closed out curve flattener trades. Most analysts forecast these trades will come back in vogue. "The momentum of the market has gotten ahead of itself. We will ultimately see the curve flatten further," said Ira Jersey, head of U.S. rates strategist at Credit Suisse in New York.

The U.S. 30-year bond plummeted 2 0/32 in price to yield 2.827 percent in afternoon trading before bouncing back slightly.

On Thursday, the U.S. Labor Department said first-time filings for state jobless benefits declined by 6,000 to 289,000 for the week ended Dec. 13. On the other hand, the Philadelphia Federal Reserve said it index on business conditions in the Mid-Atlantic region fell in December from the November reading which was the highest since December 1993.

On balance, however, Thursday's data supported the view that there might be enough momentum for the U.S. economy to expand at a moderate 2.5-3.0 percent pace in 2015 without near-zero interest rates, analysts said.

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The gap between two-year and 10-year yields expanded to 1.58 percentage points from 1.54 points on Wednesday. It reached 1.51 points, its tightest level in 19 months on Tuesday. Despite a renewed drop in oil prices, Treasury Inflation-Protected Securities (TIPS) showed some stabilization ahead of a $16 billion auction of five-year TIPS supply at 1 p.m. (1800 GMT). The TIPS sector has been hammered by the steep drop in crude prices from their peak in June. January U.S. crude futures fell 93 cents to $55.55 a barrel. On Tuesday, they fell to 5-1/2-year low of $53.

On Wednesday, the Fed said it would be "patient" on timing for a rate hike, depending on domestic growth and inflation, both of which have been running below average. The dramatic drop in oil prices in recent weeks and economic weakness in Europe and Japan had reduced traders' expectations that the Fed in 2015 would boost rates from the near-zero levels adopted six years ago. Still, evidence of a strengthening labor market and Fed forecasts that inflation would pick up have kept the start of rate normalization on track for sometime in 2015, according to the latest Fed statement.

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