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TREASURIES-U.S. curve flattens as 2-year yields hit 9-year high

(New throughout, updates prices and market activity, adds comment and details on funding bill)

* Five-year, 30-year spread hits lowest point in over a decade

* Two-year yields highest since 2008

NEW YORK, Jan 17 - The U.S. yield curve flattened to a decade-low spread between 5-year and 30-year yields and two-year Treasury yields hit a nine-year high on Wednesday on expectations the Federal Reserve will continue to tighten monetary policy this year. At 43.7 basis points, the spread between 5-year and 30-year yields hit its lowest level since August 2007. This is "a classic tale of two markets. The front end of the curve is responding to the Feds insistence on continuing to hike rates while the longer end of the curve is responding to a more benign global inflation environment," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. Two-year yields, which are the maturity most sensitive to Fed interest rate hikes, have been rising as robust economic data has affirmed the FOMC's hawkish sentiment. Last Friday's stronger-than-expected core CPI report increased the odds of a March rate hike, with the rate futures market pricing in a more than 70 percent chance, according to the CME's FedWatch. As the continuing resolution, or stopgap funding bill, is due to expire Friday, investors will be watching Congress to see if it can put together a funding bill in time to avoid a U.S. government shutdown. The White House said on Wednesday it supports a short-term bill to fund the government and prevent a shutdown, even though its first preference would have been for a long-term deal.

But it remains unclear whether Congress will back such a bill. Republican Senator Lindsey Graham said he would not vote for a bill from his own party, according to Politico. Democratic Senator Robert Menendez said the White House is making unacceptable demands on immigration measures. Thus far, the market has not moved on news of the tense negotiations. "It has typically been an eleventh hour decision...which I think the market always holds out for" said Ellis Phifer, market strategist at Raymond James in Memphis. The U.S. economy and inflation expanded at a modest-to-moderate pace in the final months of 2017, while wages continued to push higher, the Fed reported in its Beige Book report on Wednesday. Later Wednesday, three Fed officials will speak: Cleveland Fed President Loretta Mester, Chicago Fed President Charles Evans and Dallas Fed President Robert Kaplan. At 2:08 p.m.(1908 GMT), 10-year Treasury yields were 2.561 percent, above Tuesday's close at 2.544 percent. Two-year yields were 2.039 percent, after hitting 2.047 percent earlier in the day, its highest since September 2008.

January 17 Wednesday 2:11PM New York / 1911 GMT Price

US T BONDS MAR8 150-21/32 -0-5/32 10YR TNotes MAR8 122-196/256 -0-56/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.42 1.4449 0.000 Six-month bills 1.595 1.6303 -0.003 Two-year note 99-176/256 2.039 0.021 Three-year note 99-142/256 2.1545 0.027 Five-year note 98-204/256 2.384 0.029 Seven-year note 98-100/256 2.5036 0.028 10-year note 97-76/256 2.5628 0.019 30-year bond 98-92/256 2.8317 -0.003

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 19.50 -0.50

spread

U.S. 3-year dollar swap 18.25 -0.50

spread

U.S. 5-year dollar swap 5.00 -0.75

spread

U.S. 10-year dollar swap 0.50 0.00

spread

U.S. 30-year dollar swap -17.25 0.75

spread

(Reporting by Kate Duguid; Editing by Phil Berlowitz and David Gregorio)