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TREASURIES OUTLOOK-U.S. yield curve flattening takes breather

* Profit-taking emerges on recent curve-flattening move

* Flattening trend seen intact on rate hike, tax cut views

* U.S. 2-year yield dips after hitting more than 9-year peak

* U.S. home builder data come in stronger than forecast

(Repeats to additional subscribers) NEW YORK, Dec 18 (Reuters) - The margin between U.S. shorter-dated and longer-dated Treasury yields widened on Monday from its slimmest in a decade as traders booked profits on curve-flattening positions tied to the view the Federal Reserve would raise interest rates further. Expectations that inflation would remain tame and the government would increase its short-term borrowing with the possible passage of the Republican-backed tax cut bill had supported traders favoring longer-dated Treasuries over shorter-dated ones. "There is a bit of profit-taking on the recent big flattening move," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia. Last week, Fed policymakers signaled they expected the U.S. central bank would hike rates three times in 2018, projecting a short-term jump in economic growth from the Trump administration's proposed tax cuts. Top U.S. Republicans said on Sunday they anticipated Congress would pass their tax overhaul this week. Independent government analyses estimated the plan would tack on at least $1 trillion to the $20 trillion in national debt.

Analysts expected the Treasury Department would raise its issuance of Treasury debt maturing out to five years to finance an increase in the federal deficit from the tax proposal. A possible increase in Treasury supply, possibly in early 2018, spurred a rise in short- to medium-term yields early on Monday. The yield increase on those maturities cooled as profit-taking on curve flatteners emerged with a surge in stock prices on Wall Street on optimism about the passage of the tax cuts. The three major U.S. stock indexes reached record highs on Monday. In late trading, the two-year Treasury yield was down 0.8 basis point at 1.832 percent after hitting a nine-year peak of 1.857 percent earlier. The spread between five-year and 30-year yields hit 51.9 basis points, a level not seen since October 2007, before steepening to 57.5 basis points. It ended at 53.3 basis points on Friday, according to Tradeweb. Despite Monday's curve steepening, the recent trend of curve flattening appeared intact, analysts said. "The (steepening) move was fairly modest. Longer-term, we expect the curve to continue flattening," said Justin Hoogendoorn, head of fixed income strategy and analysis at Piper Jaffray in Chicago. On the data front, the National Association of Home Builders said its housing market index, which is seen as a proxy on home construction, rose to 74 points in December, stronger than forecast and above a revised 69 in November. Economists are monitoring whether the mild pickup in mortgage rates in recent weeks has begun denting housing activity. Reports on new and existing home sales will be released later this week. December 18 Monday 3:17PM New York / 2017 GMT Price

US T BONDS MAR8 153-6/32 -1-3/32 10YR TNotes MAR8 124-60/256 -0-48/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.325 1.3477 0.031 Six-month bills 1.45 1.4807 0.003 Two-year note 99-216/256 1.8318 -0.008 Three-year note 99-204/256 1.9452 -0.003 Five-year note 99-56/256 2.1673 0.010 Seven-year note 98-220/256 2.3035 0.024 10-year note 98-188/256 2.3942 0.039 30-year bond 100-32/256 2.7438 0.055 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 56.00 4.70 30-year vs 5-year yield 57.60 4.35

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 20.00 1.50

spread

U.S. 3-year dollar swap 17.75 1.75

spread

U.S. 5-year dollar swap 4.75 0.50

spread

U.S. 10-year dollar swap -1.50 -0.25

spread

U.S. 30-year dollar swap -20.50 -0.50

spread

(Reporting by Richard Leong; Editing by Jonathan Oatis and Paul Simao)