×

TREASURIES OUTLOOK-U.S. yield curve steepens; junk sector stabilizes

* Junk bonds rebound after losses on doubts about tax cuts

* U.S. longer-dated yields hit 1-1/2 week highs

* U.S. 2-year yield sets nine-year peak

* U.S. yield curve steepens from flattest in a decade

(Repeats to additional subscribers with no change to text) NEW YORK, Nov 10 (Reuters) - U.S. Treasury yields rose on Friday, steepening the yield curve, as traders closed out some curve-flattener positions and dealers reduced their holdings of longer-dated debt following this week's auctions. Dealers sold their purchases from the $23 billion 10-year and $15 billion 30-year auctions this week, which were part of the government's $64 billion quarterly refunding, analysts said. Curve flatteners, in which traders favor longer-dated issues over shorter-dated ones, have made longer-maturity Treasuries expensive. The sell-offs in junk bonds and stocks have raised concerns about stretched valuation across asset classes given their impressive gains this year, traders and analysts said. The curve move coincided with some stabilization in the junk bond sector, which had been battered in recent days, partly on worries about a delay in U.S. federal tax cuts. Yield spreads between short- and longer-dated Treasuries grew to their widest in a week. "It's a reversal of the recent flattening and repositioning along the curve," said Mike Lorizio, head of Treasuries trading at Manulife Asset Management in Boston. The two biggest U.S.-listed junk bond exchange-traded funds Thursday. Still, they posted their biggest weekly loss in three months. The three major U.S. stock indexes were flat to 0.1 percent lower on the day, off initial lows.

The 10-year Treasury yield reached a 1-1/2 week peak of 2.405 percent, after hitting a near three-week trough of 2.304 percent two days earlier. The two-year yield reached a nine-year high of 1.662 percent. The yield spread between two-year and 10-year Treasuries widened to 74.0 basis points from a decade-tight level of 65.9 basis points on Thursday, Reuters data showed. Traders had favored curve flatteners the past two weeks on concerns about the tax overhaul and a diminished likelihood of an introduction of a Treasury bond that matures beyond 30 years. Other factors were expectations that the Federal Reserve would hike rates further and domestic inflation remaining below the Fed's 2 percent goal. The Treasuries sell-off was exacerbated early on Friday by a drop in German government debt prices, following perceived hawkish rhetoric from European Central Bank Council member Ewald Nowotny. Nowotny said the ECB should have given a clear signal at its policy meeting last month about ending its 2.55 trillion bond purchase program in September 2018 if the euro zone economy improves further. November 10 Friday 3:13PM New York / 2013 GMT Price

US T BONDS DEC7 152-10/32 -1-18/32 10YR TNotes DEC7 124-176/256 -0-128/2

56

Price Current Net Yield % Change

(bps)

Three-month bills 1.21 1.2304 -0.003 Six-month bills 1.3375 1.3651 0.013 Two-year note 99-178/256 1.6582 0.025 Three-year note 99-226/256 1.7903 0.035 Five-year note 99-192/256 2.0532 0.050 Seven-year note 99-236/256 2.2621 0.063 10-year note 98-172/256 2.4002 0.069 30-year bond 97-100/256 2.8805 0.075 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 74.00 3.55 30-year vs 5-year yield 82.70 2.30

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 20.00 0.50

spread

U.S. 3-year dollar swap 18.00 0.25

spread

U.S. 5-year dollar swap 6.25 -0.25

spread

U.S. 10-year dollar swap -2.25 0.00

spread

U.S. 30-year dollar swap -26.75 0.00

spread

(Reporting by Richard Leong; Editing by Dan Grebler and Rosalba O'Brien)