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TREASURIES-Yields dip as U.S. data fuels doubts over Fed rate hikes

* U.S. May housing starts weaker than expected

* Data compounds doubts over third Fed rate hike in 2017

* Yields on 2-30 year Treasuries set for weekly declines

NEW YORK, June 16 (Reuters) - U.S. Treasury yields edged lower on Friday, with all maturities on track for weekly declines, after weaker-than-expected U.S. housing data fueled doubts that the Federal Reserve will be able to raise interest rates again this year. Housing starts dropped 5.5 percent to a seasonally adjusted annual rate of 1.09 million units in May, the Commerce Department said on Friday. That was the lowest since September 2016. Economists polled by Reuters had forecast groundbreaking activity rising to a rate of 1.22 million units. Analysts said the data compounded concerns about the underlying health of the U.S. economy after government figures on inflation and retail sales for May, released on Wednesday, fell well short of market expectations. The data also reinforced traders' doubts, analysts said, that the Fed would be able to hike again later this year, as the central bank projected Wednesday, when it raised interest rates for the second time in 2017. "If housing is weak, then economic growth is going to be weaker, too," said Stan Shipley, fixed income strategist at Evercore ISI in New York. "The Fed may be a little more cautious hiking in that environment." Benchmark 10-year Treasuries were last up 2/32 in price to yield 2.153 percent, compared with 2.162 percent late Thursday. Two-year Treasuries were last up 2/32 in price to yield 1.319 percent, compared with 1.355 percent late Thursday. Traders are particularly concerned about soft U.S. inflation readings, which have been viewed as an obstacle to the Fed's plan, outlined on Wednesday, to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, while raising rates for a third time this year. "Really, whats causing the markets to be somewhat skeptical of the Feds hiking path is that inflation has been trending downwards," said Praveen Korapaty, global head of rates at Credit Suisse in New York. "There is some weakness in other data as well, but from my perspective the critical thing is the trajectory of inflation." Korapaty said, however, that he expects inflation to recover and that Credit Suisse expects the Fed to start paring its balance sheet in September and increase rates again in December. Yields on Treasuries maturing between two and 30 years were set for weekly declines after rising the previous week. Benchmark 10-year yields were set to fall about five basis points for the week.

June 16 Friday 11:04AM New York / 1504 GMT Price

US T BONDS SEP7 155-21/32 0-6/32 10YR TNotes SEP7 126-208/256 0-44/256 Price Current Net Yield % Change

(bps)

Three-month bills 0.9925 1.0087 -0.010 Six-month bills 1.1025 1.1239 -0.003 Two-year note 99-222/256 1.3192 -0.036 Three-year note 100-20/256 1.4732 -0.024 Five-year note 100-8/256 1.7433 -0.019 Seven-year note 100-52/256 1.9685 -0.015 10-year note 101-248/256 2.1531 -0.009 30-year bond 104-96/256 2.7834 -0.002

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 20.75 2.00

spread

U.S. 3-year dollar swap 16.50 0.25

spread

U.S. 5-year dollar swap 7.25 -0.25

spread

U.S. 10-year dollar swap -3.25 -0.50

spread

U.S. 30-year dollar swap -38.00 -1.00

spread

(Reporting by Sam Forgione; Editing by Steve Orlofsky)