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TREASURIES-U.S. two-year yields hit 9-year peak, curve flattening resumes

* Yield curve flattening trend intact

* Friday's steepening trend more supply-driven

* Flat yield curve does not necessarily mean recession-analyst

(Adds comment, updates prices) NEW YORK, Nov 13 (Reuters) - U.S. Treasury two-year note yields hit a fresh nine-year high on Monday, as the yield curve resumed its flattening and investors priced in a 25-basis-point interest rate hike by the Federal Reserve in December. A flat yield curve suggests the Fed is on course to hike interest rates, even though tepid inflation should cap longer-dated yields. Philadelphia Fed President Patrick Harker earlier on Monday supported the yield flattening view. He said in Tokyo that he has "lightly penciled in" a December rate hike. However, he said he had slightly less conviction about the policy decision than he had last month as he "continues to elicit caution" about weak inflation. The yield gap between shorter-dated and longer-dated Treasuries shrank on Monday, with the spread between five-year and 30-year yields at 79.30 basis points. The spread between U.S. two-year note yields and U.S. 10-year notes also contracted to 71.30 basis points.

On Friday, the yield curve steepened as dealers reduced their holdings of longer-dated debt following last week's auctions. "The steepening might have been supply-driven and perhaps now that we're past supply, more people are coming in to buy the long end," said Gennadiy Goldberg, interest rates strategist at TD Securities in New York. Aside from rate hike expectations, the Treasury's posture also contributed to the flatter curve, as the government planned to finance much of next year' deficit through bills, and avoided bringing longer-dated paper into the financing calendar, according to Action Economics. Often flatter and especially inverted yield curves suggest an incoming economic slowdown, although strategists were not clear that is true in this case. "There's a lot of fears that a flatter curve is an indicator of recession," said TD's Goldberg. "It's not necessarily so. We're still steeper than where we were in previous (recession) cycles. I don't think we're near levels that would indicate a recession." In afternoon trading, the 10-year Treasury yield was at 2.402 percent, up slightly from 2.4 percent late on Friday. The two-year yield hit a nine-year peak of 1.687 percent, up from 1.662 percent last Friday. U.S. 30-year yields, meanwhile, fell to 2.867 percent, from Friday's 2.88 percent

November 13 Monday 3:24PM New York / 2024 GMT Price

US T BONDS DEC7 152-13/32 0-3/32 10YR TNotes DEC7 124-156/256 -0-24/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.195 1.2151 -0.015 Six-month bills 1.3425 1.3702 0.007 Two-year note 99-164/256 1.6869 0.025 Three-year note 99-206/256 1.8172 0.029 Five-year note 99-166/256 2.0749 0.020 Seven-year note 99-216/256 2.2743 0.012 10-year note 98-168/256 2.402 0.002 30-year bond 97-160/256 2.8686 -0.011

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 19.25 -0.50

spread

U.S. 3-year dollar swap 17.50 -0.25

spread

U.S. 5-year dollar swap 6.25 0.00

spread

U.S. 10-year dollar swap -1.75 0.50

spread

U.S. 30-year dollar swap -25.25 1.50

spread

(Reporting by Gertrude Chavez-Dreyfuss editing by Jeffrey Benkoe and Jonathan Oatis)