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TREASURIES-U.S. yield curve flattening marches on

* Expected passage of U.S. tax bill fuels flattening move

* U.S. 2-year yield touches 9-year high

* Home builder sentiment leads week's U.S. housing data

(Updates market action, adds quote) NEW YORK, Dec 18 (Reuters) - The gap between U.S. shorter-dated and longer-dated Treasury yields contracted to its smallest in a decade on Monday on expectations the government would increase its short-term borrowing with the possible passage of the federal tax cut bill. The curve-flattening move has been underpinned on the view the Federal Reserve would ratchet up short-term interest rates even as long-term inflation appears to stay tame. "Curve flattening is into the third day of one of its most intense periods this year. The last time flattening was this fast was in May when the Fed appeared to confirm the years second rate hike would arrive in June," FTN Financial interest rate strategist Jim Vogel wrote in a research note. Last week, Fed policymakers signaled that they expected the U.S. central bank would hike rates three times in 2018 on faster economic growth from potentially lower taxes. Top U.S. Republicans said on Sunday they anticipated Congress would pass their tax overhaul plan this week. Independent government analyses estimated the plan would tack on at $1 trillion to the $20 trillion in national debt.

Analysts expected the Treasury Department would raise its issuance of Treasury bills and notes maturing out to five years to finance an increase in the federal deficit from the tax proposal. An expected increase in Treasury supply, possibly in early 2018, added to the rise in short- to medium-term yields with two-year yield hitting a fresh nine-year peak early Monday at 1.857 percent. Five-year Treasury yield rose 1.4 basis points to 2.171 percent, just short of the 6-1/2-year high set last week. The spread between five-year and 30-year yields touched 51.9 basis points, a level not seen since October 2007, before moving to 53.4 basis points, according to Tradeweb. As the curve flattening has persisted, the Commitments of Traders data released late Friday showed speculative net longs in CBOT 30-year Treasury bond futures reached an all-time peak of 100,910 contracts last Tuesday. On the data front, the National Association of Home Builders will release its December data on its members' sentiment on the domestic housing market at 10 a.m. (1500 GMT). Economists are monitoring whether the mild pickup in mortgage rates in recent weeks has begun denting home sales and construction. Analysts polled by Reuters forecast the NAHB housing market index likely held steady at 70 points in December. Reports on new and existing home sales will be released later this week.

December 18 Monday 9:11AM New York / 1411 GMT Price

US T BONDS MAR8 153-28/32 -0-13/32 10YR TNotes MAR8 124-68/256 -0-40/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.31 1.3324 0.015 Six-month bills 1.4525 1.4833 0.005 Two-year note 99-208/256 1.8483 0.008 Three-year note 99-192/256 1.9615 0.014 Five-year note 99-52/256 2.1706 0.014 Seven-year note 98-228/256 2.2986 0.020 10-year note 98-228/256 2.3762 0.021 30-year bond 100-216/256 2.7086 0.020 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 52.60 1.30 30-year vs 5-year yield 53.70 0.50

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 19.25 0.75

spread

U.S. 3-year dollar swap 16.50 0.50

spread

U.S. 5-year dollar swap 4.25 0.00

spread

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

spread

U.S. 30-year dollar swap -20.00 0.00

spread

(Reporting by Richard Leong; Editing by Jonathan Oatis)