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TREASURIES-Rising Libor lifts two-year yield to decade high

* 3-month Libor/OIS rate spread widens to 51.05 basis points

* Two-year yield at 2.291 percent, a decade high

* Yield curve continues to flatten

(Recasts lead with two-year yields risings; updates quotes, table) NEW YORK, March 15 (Reuters) - The Treasury bond yield curve continued to flatten on Thursday as the surging spread between Libor and the overnight indexed swap rate pressured the short end of the curve, lifting the two-year yield to a decade high. The spread between those two rates, a gauge of stress in U.S. money markets, rose to its highest level in more than six years, lifted by increased issuance of Treasury bills. The yield on the two-year Treasury note, which is particularly sensitive to interest rate policy, continued to rise on Thursday, though the expectation the Federal Reserve will hike interest rates at next week's policy meeting was already priced in by the market. The two-year yield hit 2.291 percent on both Wednesday and Thursday, its highest level since September 2008. "Libor resetting higher once again is putting some pressure on the front end," said Mike Lorizio, senior fixed income trader, at Manulife Asset Management in New York. The spread between the three-month dollar London interbank offered rate and three-month overnight indexed swap rate widened to 51.05 basis points, the highest level since 2012. The Treasury Department is slated to auction over $400 billion in new issuance this quarter, most of which will be in Treasury bills. The suspension of the U.S. debt ceiling in February has allowed the government to increase debt issuance to pay for various policy initiatives. The boost in supply has caused Treasury bill yields to rise compared with the overnight index swaps rate, as investors demand a higher premium for holding the bills. The rise at the short end of the yield curve has been matched by a fall at the long end, as the release of weak economic data, in particular retail sales and consumer prices, has driven down inflation and growth expectations. The spread between the 2- and 10-year yields shrank to 53.40 basis points, a fourth straight day of contraction, reapproaching the decade low hit in January. The spread between 5- and 30-year yields was down to 43.70 basis points, also approaching decade lows hit in early February. The yield on the benchmark government note was last at 2.819 percent, just above Wednesday's close at 2.817 percent. The yield on the two-year note was last at 2.283 percent, above Wednesday's close at 2.262 percent.

March 15 Thursday 3:28PM New York / 1928 GMT Price

US T BONDS JUN8 144-30/32 0-2/32 10YR TNotes JUN8 120-136/256 -0-4/256 Price Current Net Yield % Change

(bps)

Three-month bills 1.74 1.7719 0.018 Six-month bills 1.9 1.945 0.008 Two-year note 99-242/256 2.2785 0.016 Three-year note 99-220/256 2.4239 0.016 Five-year note 100-12/256 2.6147 0.007 Seven-year note 99-252/256 2.7524 0.000 10-year note 99-100/256 2.8207 0.004 30-year bond 98-248/256 3.0527 -0.005

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 29.75 -1.50

spread

U.S. 3-year dollar swap 25.00 -1.25

spread

U.S. 5-year dollar swap 14.00 -1.25

spread

U.S. 10-year dollar swap 3.50 -0.75

spread

U.S. 30-year dollar swap -14.50 -0.50

spread

(Reporting by Kate Duguid; Editing by Jonathan Oatis and Leslie Adler)