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TREASURIES-U.S. yield curve flattens; volatility hovers at record low

* U.S. 3-year note supply sold at highest yield since 2010

* U.S. yield curve flattens to levels not seen in a decade

* Bond market volatility measures close to record lows

(Updates market action, adds quote) NEW YORK, Nov 7 (Reuters) - U.S. Treasury yields fell on Tuesday, flattening the yield curve to a level not seen in a decade, as $24 billion worth of three-year government debt, the first leg of this week's $64 billion quarterly refunding, fetched average demand. The drop in longer-dated yields with 30-year yields touching a six-week low, pinned short-term gauges of Treasury market volatility near all-time lows. "It was a quiet, firm day for the market. We have a pretty strong flattening trend that will probably continue into 2018," said John Canavan, market strategist at Stone & McCarthy Research Associates in New York. Traders have favored longer-dated Treasuries over shorter-dated issues on expectations of further interest rate increases from the Federal Reserve and domestic inflation staying below the Fed's 2-percent target, analysts said. Uncertainty about the passage of a Republican-sponsored bill to overhaul the federal tax code and diminished likelihood the government will introduce a Treasury bond that matures beyond 30 years have increased the appeal of "curve-flattener" trades, they said. The two-year yield was a tad higher at 1.629 percent, while the 10-year yield slipped 1 basis point at 2.307 percent. This still narrowed their yield spread to just over 67 basis points, which was the tightest since November 2007, Reuters data showed. The 30-year yield shed 3 basis points at 2.769 percent, a hair above a six-week low of 2.765 percent. The latest three-year note supply enticed average demand from investors, resulting in the highest yield for this maturity at an auction since April 2010, Treasury data showed. The Treasury Department will auction $23 billion in 10-year debt on Wednesday and $15 billion in 30-year bonds on Thursday. Meanwhile, the curve flattening has coincided with the drop in short-term market volatility, which is a proxy of investors' confidence that inflation would stay low and the Federal Reserve will unlikely deviate from its gradual pace to raising short-term rates. The CBOE 10-year U.S. Treasury Note Volatility Index , which is seen as the bond market's counterpart to the VIX index for Wall Street, reached an all-time low of 3.55 on Friday before ticking up to 3.68 on Tuesday. Another gauge of short-term bond volatility, the Bank of America Merrill Lynch one-month MOVE index, hit a record low of 45.05 on Monday. "Inflation is tame and is expected to remain tame. You are going to see even lower volatility," Canavan said. November 7 Tuesday 3:24PM New York / 2024 GMT Price

US T BONDS DEC7 154-21/32 0-14/32 10YR TNotes DEC7 125-100/256 0-8/256 Price Current Net Yield % Change

(bps)

Three-month bills 1.2 1.2204 0.007 Six-month bills 1.305 1.3319 0.003 Two-year note 99-192/256 1.6289 0.008 Three-year note 99-176/256 1.7346 0.006 Five-year note 100-18/256 1.9851 -0.002 Seven-year note 100-132/256 2.1699 -0.005 10-year note 99-124/256 2.3091 -0.011 30-year bond 99-152/256 2.77 -0.026 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 67.80 -1.30 30-year vs 5-year yield 78.40 -2.50

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 20.50 0.00

spread

U.S. 3-year dollar swap 19.75 -0.50

spread

U.S. 5-year dollar swap 7.25 0.00

spread

U.S. 10-year dollar swap -2.50 0.25

spread

U.S. 30-year dollar swap -26.25 1.00

spread

(Reporting by Richard Leong; Editing by Andrea Ricci; editing