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 was on course to hike interest rates, while tepid inflation should cap longer-dated yields. The yield gap between shorter-dated and longer-dated Treasuries shrank on Monday, with the spread between five-year and 30-year yields at 80.70 basis points. The spread between U.S. two-year note yields and U.S. 10-year notes also contracted to 71.70 basis points.
On Friday, the yield curve steepened on technical factors and dealers reduced their holdings of longer-dated debt following this week's auctions. "The steepening last week was temporary because the longer-term trend of flattening is very much intact," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale 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. In late-morning trading, the 10-year Treasury yield was at 2.393 percent from 2.4 percent late on Friday. The two-year yield hit a nine-year peak of 1.679 percent, up from 1.662 percent last Friday.
November 13 Monday 11:19AM New York / 1619 GMT Price
US T BONDS DEC7 152-14/32 0-4/32 10YR TNotes DEC7 124-172/256 -0-8/256 Price Current Net Yield % Change
Three-month bills 1.2075 1.2278 -0.002 Six-month bills 1.345 1.3728 0.010 Two-year note 99-170/256 1.6747 0.013 Three-year note 99-216/256 1.8037 0.016 Five-year note 99-178/256 2.0649 0.010 Seven-year note 99-228/256 2.267 0.005 10-year note 98-176/256 2.3984 -0.002 30-year bond 97-152/256 2.8702 -0.010
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 20.00 0.25
U.S. 3-year dollar swap 18.25 0.50
U.S. 5-year dollar swap 6.50 0.25
U.S. 10-year dollar swap -2.00 0.25
U.S. 30-year dollar swap -26.00 0.75
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jeffrey Benkoe)