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TREASURIES-U.S. yield curve flattest in 10 years as markets see more hikes

(Adds new comment, updates prices, table) NEW YORK, Nov 15 (Reuters) - The gap between U.S. short-dated and long-dated U.S. Treasury yields contracted to its tightest in a decade after data showed a pickup in U.S. underlying inflation and an unexpected rise in retail sales, as the market priced in further interest rate hikes next year. The flattening of the yield curve reflects expectations that the Federal Reserve will continue to raise rates, pushing yields on the short end higher. At the same time, U.S. inflation, although trending higher, will likely remain subdued, limiting yields on longer-dated bonds. "The details of both reports for October's retail sales and consumer (CPI) inflation were resilient enough to maintain the FOMC along the short-end interest rate tightening path," said John Herrmann, rates strategist at MUFG Securities Americas in New York. The gap between U.S. two-year note and U.S. 10-year note yields contracted to 63.4 basis points, the smallest since November 2007. The difference in five-year and 30-year yields narrowed to just under 75 basis points, the flattest in nearly two weeks. U.S. consumer prices edged up in October, and rising rents and healthcare costs pointed to a gradual buildup in underlying inflation. "The Fed was already on track to press ahead with another rate hike in December, not least because the unemployment rate has already fallen well below their end-year forecast," said Michael Pearce, U.S. economist at Capital Economics in New York. "With signs that underlying inflation pressures are starting to pick back up again, we think the Fed will need to step up the pace of tightening next year, raising the Fed funds rate a total of four times in 2018," he added. Another report showed U.S. retail sales unexpectedly rose 0.2 percent in October, with the data for September revised to show sales jumping 1.9 percent rather than the previously reported 1.6 percent advance. In afternoon trading, the 10-year Treasury yield fell to 2.336 percent, from 2.381 percent late on Tuesday. The U.S. two-year yield was at 1.687 percent, from 1.691 percent on Tuesday. U.S. 30-year bond yields slid to 2.784 percent, down from Tuesday's 2.839 percent.

Wednesday, Nov. 15 at 1435 EST (1935 GMT): Price

US T BONDS DEC7 153-31/32 1-3/32 10YR TNotes DEC7 125-12/256 0-80/256 Price Current Net yield Change (pct) (bps) Three-month bills 1.24 1.2612 -0.010 Six-month bills 1.3675 1.3961 0.000 Two-year note 99-164/256 1.6875 -0.003 Three-year note 99-218/256 1.8011 -0.011 Five-year note 99-208/256 2.0399 -0.025 Seven-year note 100-48/256 2.2207 -0.036 10-year note 99-56/256 2.3381 -0.043 30-year bond 99-80/256 2.784 -0.055

DOLLAR SWAP SPREADS

Last (bps) Net

change (bps)

U.S. 2-year dollar swap 17.50 -1.00

spread

U.S. 3-year dollar swap 16.50 -0.50

spread

U.S. 5-year dollar swap 5.25 -0.50

spread

U.S. 10-year dollar swap -1.75 0.25

spread

U.S. 30-year dollar swap -24.75 0.25

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Meredith Mazzilli)