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TREASURIES-U.S. 10-year yields hit 5-1/2-month highs as risk appetite rises

NEW YORK, Oct 24 (Reuters) - U.S. benchmark 10-year Treasury yields rose to their highest in more than five months on Tuesday, in line with gains in the European bond market, with a strong U.S. equity performance also adding to the overall risk appetite. U.S. 30-year bond yields also rallied, climbing to a three-week peak, while those on two-year notes were near a recent nine-year high. "Some positive bounce in risk market appears to be the proximate cause," Guy LeBas, chief fixed income strategist, at Janney Montgomery Scott in Philadelphia, said. Wall Street's Dow Jones index touched a record high on Tuesday. Strong earnings and optimism about U.S. President Donald Trump's tax plans underpinned the Dow and S&P, which closed at all-time highs on all five trading days last week. U.S. Treasuries also took their cue from European government bond yields, as those on German Bunds hit two-week peaks. Strong business and bank lending surveys backed a growing view that the European Central Bank will announce a reduction of its monthly bond purchases on Thursday. Thursday's ECB monetary policy meeting has limited interest in bonds, analysts said. Investors are also looking to the U.S. Treasury's $26-billion two-year note auction later on Tuesday. Action Economics said in its blog the two-year note may be "cheap enough" to attract strong demand especially with the Federal Reserve on a path to normalizing interest rates. It added that wide spreads against European government bonds and other sovereigns will be supportive of the two-year note auction as well, with many sovereign bonds trading with negative rates. In late morning trading, 10-year U.S. Treasury note prices were down 7/32, yielding 2.4 percent, up from Monday's 2.375 percent. Earlier, 10-year yields rose to 2.414 percent, the highest since mid-May. "Trading around these levels in the 10-year tends to be driven by technicals," Janney's LeBas said. "Markets seem to have a date with 2.40 percent based on strikes and open interest." The 30-year bond prices fell 18/32, with a yield of 2.919 percent, down from 2.89 percent late on Monday. Thirty-year yields had risen to a three-week high of 2.931 percent. Ahead of the auction, U.S. two-year note yields were at 1.576 percent, up from 1.568 percent the previous session. On Monday, two-year hit a nine-year peak of 1.5890 percent.

October 24 Tuesday 9:54AM New York / 1354 GMT Price

US T BONDS DEC7 151-25/32 -0-18/32 10YR TNotes DEC7 124-188/256 -0-48/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.1075 1.1261 0.028 Six-month bills 1.25 1.2754 0.010 Two-year note 99-158/256 1.5769 0.009 Three-year note 99-190/256 1.7143 0.013 Five-year note 99-74/256 2.0271 0.020 Seven-year note 99-60/256 2.2448 0.022 10-year note 98-176/256 2.4008 0.026 30-year bond 96-168/256 2.9186 0.029

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 23.50 0.50

spread

U.S. 3-year dollar swap 22.00 0.25

spread

U.S. 5-year dollar swap 7.00 -0.25

spread

U.S. 10-year dollar swap -3.00 0.00

spread

U.S. 30-year dollar swap -30.25 0.00

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Susan Thomas)