×

TREASURIES-U.S. yields rise as Yellen repeats view on slow rate hikes

* Fed Yellen sees gradual U.S. rate hikes despite low inflation

* U.S. 2-year note sold at highest yield in nearly 9 years

* Trump offers hints on tax plan, raises borrowing concerns

(New throughout, updates yields, prices, market activity and comments) NEW YORK, Sept 26 (Reuters) - U.S. Treasury yields rose on Tuesday as Federal Reserve Chair Janet Yellen stuck to the view that the central bank remains on track for gradual interest rate increases even as inflation remains below its 2 percent goal. The notion of higher rates caused investors at the two-year Treasury note auction to demand the highest yields in nearly nine years, kicking off this week's $88 billion short- and medium-dated government debt supply on a soft note. The rise in U.S. yields was stoked further when U.S. President Donald Trump said he and lawmakers were working to pass a big tax cut for the middle class. Traders had no details, but speculated the plan might raise the federal deficit and increase government borrowing. Yellen "repeated that inflation being low as transitory and the Fed is on a gradual pace of rate hikes," said Brian Daingerfield, macro strategist at NatWest Markets in Stamford, Connecticut. Last Wednesday, the policy making Federal Open Market Committee left the door open for another rate increase in December and said it will begin to reduce its $4.5 trillion balance sheet in October. Despite "many uncertainties" around how inflation is behaving, it nevertheless "would be imprudent to keep monetary policy on hold until inflation is back to 2 percent," Yellen said in a speech at the National Association for Business Economics' annual conference in Cleveland. The yield on benchmark 10-year Treasury notes was up almost 2 basis points at 2.239 percent after recording a 4 basis-point fall on Monday, which was the biggest in more than two weeks. The two-year yield which rises with traders' expectations of higher short-term rates, touched 1.456 percent, the highest since October 2008. The Treasury Department sold $26 billion of two-year notes at a yield of 1.462 percent, the highest in nearly nine years.

Bond yields declined on Monday on safe-haven demand due to tensions between North Korea and the United States and surging support for the far right in Sunday's German election. Overall yields have held in a narrow trading range since falling near 2 percent in earlier September. "In the big picture, nothing has changed," said Bill Merz, head of fixed-income research at U.S. Bank Wealth Management in Minneapolis. With global economic growth improving and major central banks still providing ample liquidity, "we are comfortable with taking risk," Merz said. "We have an underweight in fixed income and an overweight in stocks." September 26 Tuesday 3:33PM New York / 1933 GMT Price

US T BONDS DEC7 154-18/32 -0-11/32 10YR TNotes DEC7 125-236/256 -0-36/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.05 1.0674 0.043 Six-month bills 1.17 1.1933 0.002 Two-year note 99-162/256 1.4439 0.017 Three-year note 99-108/256 1.5751 0.016 Five-year note 98-230/256 1.86 0.024 Seven-year note 98-172/256 2.0818 0.022 10-year note 100-24/256 2.2392 0.019 30-year bond 99-104/256 2.7793 0.020

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 26.75 0.25

spread

U.S. 3-year dollar swap 23.00 0.50

spread

U.S. 5-year dollar swap 8.00 -0.50

spread

U.S. 10-year dollar swap -4.00 -0.25

spread

U.S. 30-year dollar swap -32.50 -0.50

spread

(Reporting by Richard Leong; Editing by Susan Thomas and David Gregorio)