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TREASURIES-U.S. bond yields fall as Fed hints slow stimulus removal

* Bond market breaks out of recent tight-range trading

* U.S. 5-year note sale fetches solid investor demand

* U.S. Treasury to sell $28 bln 7-year notes Thursday

(Updates throughout, adds quote) NEW YORK, May 24 (Reuters) - U.S. Treasury yields fell on Wednesday on investor relief after the Federal Reserve signaled a gradual approach on raising interest rates and winding down of its massive $4.5 trillion worth bond holdings. The bond market broke out of its listless trading of the previous two days as markets received a bit more clarity on the central bank's intention to remove more monetary stimulus following a recent string of mixed economic data. "Even though the Fed is reducing stimulus, I think this gives the market some comfort," said Matt Toms, chief investment officer of fixed income at Voya Investment Management in Atlanta. Benchmark 10-year Treasury note yield fell more than 2 basis points at 2.257 percent, while 30-year bond yield declined 2 basis points to 2.294 percent. Two-year yield, which is sensitive to traders' view on Fed policy, fell to over 2 basis points at 1.298 percent. The yield gap between two-year and 10-year Treasuries shrank over 1 basis point to 96 basis points, which was not far above the level last seen on Oct. 27. This implied traders did not expect less bond purchases from the Fed would push up longer-dated yields. Still the Fed left the door for further rate increases in the coming months, despite the growth slowdown in the first quarter. Traders expect the next hike at its June 13-14 meeting, according to interest rates futures. "Members generally judged that it would be prudent to await additional evidence indicating that a recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation," according to the latest Fed minutes.

SUPPLY Prior to the Fed minutes, bond yields were pinned down by demand for low-risk assets in the wake of Moody's downgrade of China and the deadly suicide bombing in Manchester, England.

Solid demand at a $34 billion sale of a new five-year Treasury notes, which was part of this week's $88 billion coupon-bearing Treasury supply, also held down yields. The U.S. Treasury will end this week's auctions with a $28 billion sale of seven-year debt on Thursday. In addition to Treasuries, investors were making room for a hefty supply of corporate bonds, which has put upward pressure on yields this week. The U.S. bond market will close early at 2 p.m. (1800 GMT) on Friday and will be shut on Monday for the U.S. Memorial Day holiday. May 24 Wednesday 3:46PM New York / 1946 GMT Price

US T BONDS JUN7 153-22/32 0-13/32 10YR TNotes JUN7 126-32/256 0-68/256 Price Current Net Yield % Change

(bps)

Three-month bills 0.9175 0.9324 -0.005 Six-month bills 1.0525 1.0728 -0.005 Two-year note 99-234/256 1.2936 -0.025 Three-year note 100-30/256 1.4595 -0.030 Five-year note 100-98/256 1.7935 -0.037 Seven-year note 99-156/256 2.0607 -0.034 10-year note 101-8/256 2.2589 -0.024 30-year bond 101-96/256 2.9307 -0.014

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 23.25 -0.25

spread

U.S. 3-year dollar swap 20.25 0.50

spread

U.S. 5-year dollar swap 7.50 0.75

spread

U.S. 10-year dollar swap -6.00 0.25

spread

U.S. 30-year dollar swap -44.50 1.00

spread

(Reporting by Richard Leong; Editing by Grant McCool and Andrew Hay)