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TREASURIES-U.S. yields rise, eyes on junk sector sell-off

* Traders cautious amid sell-off in stocks, junk bonds

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

* U.S. 2-year yield hovers near nine-year peak

(Updates market action, adds quote) NEW YORK, Nov 10 (Reuters) - U.S. Treasury yields rose on Friday, with two-year yields at a nine-year high as traders closed out some curve-flattener positions and dealers reduced their holdings of longer-dated debt following this week's auctions. Dealers sought to resell their purchases from the $23 billion 10-year and $15 billion 30-year auctions this week, which were parts of the November quarterly refunding, analysts said. Curve flatteners, in which traders favor longer-dated issues over shorter-dated ones, have made longer-maturity Treasuries expensive as 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. "These markets are ready for a correction," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. "So far, I'm not concerned. It's not a significant move considering how much we had moved in yields and spreads," Milstein said of the high-yield market. Some analysts blamed uncertainty over the passage of a proposal to overhaul the federal tax code for the losses in risky assets this week. The two biggest U.S.-listed junk bond exchange-traded funds seven-month lows hit on Thursday. All three major U.S. stock indexes were down about 0.2 percent in early trading. The 10-year Treasury yield reached a 1-1/2 week peak of 2.382 percent after hitting a near three-week trough of 2.304 percent two days earlier. The two-year yield hovered at a nine-yield high of 1.650 percent, which was up over 2 basis points on the day. The yield spread between two-year and 10-year Treasuries widened to 72.1 basis points from a decade-tight level of 65.9 basis points set on Thursday, Reuters data showed.

Traders had favored longer-dated Treasuries over shorter-dated issues 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. Expectations of further rate increases from the Federal Reserve and domestic inflation remaining below the Fed's 2 percent goal made "curve-flattener" more appealing. The Treasuries sell-off was exacerbated early on Friday by the drop in German government debt prices in the wake of perceived hawkish rhetoric from a European Central Bank official. ECB Council member Ewald 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 10:32AM New York / 1532 GMT Price

US T BONDS DEC7 152-21/32 -1-7/32 10YR TNotes DEC7 124-228/256 -0-76/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.215 1.2355 0.002 Six-month bills 1.33 1.3574 0.005 Two-year note 99-180/256 1.6542 0.021 Three-year note 99-236/256 1.7768 0.022 Five-year note 99-212/256 2.0365 0.033 Seven-year note 100-16/256 2.2402 0.041 10-year note 98-220/256 2.3788 0.048 30-year bond 97-192/256 2.8623 0.056 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 72.30 1.85 30-year vs 5-year yield 82.40 2.05

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 19.50 0.00

spread

U.S. 3-year dollar swap 18.25 0.50

spread

U.S. 5-year dollar swap 6.50 0.00

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)