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TREASURIES-Curve steepens slightly, volumes low ahead of FOMC next week

NEW YORK, March 16 (Reuters) - Treasuries trading volumes were low on Friday morning and, save for a modest steepening, yields were little moved as the market quieted in anticipation of next week's Federal Open Market Committee meeting, at which the U.S. central bank is expected to raise interest rates for the first time this year. "Were looking towards next Wednesday," said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald in New York. The two-day FOMC meeting will be Federal Reserve Chair Jerome Powell's first in the position, and his forward-looking statement will be the focus of the event. Powell is widely expected to continue with predecessor Janet Yellen's plan for monetary normalization, which includes raising rates to between 150-175 basis points at Wednesday's meeting. The move is anticipated by 94.4 percent of traders, according to the CME Group's FedWatch tool. What is less certain is whether the Fed will raise rates three or four times this year. Three remains the consensus, but a significant jump in inflation in January raised the chances for a fourth hike. February's Consumer Price Index report released on Tuesday, however, showed growth had cooled to 0.2 percent for the month, compared with 0.5 percent in January, complicating the economic picture. Longer-dated bond yields rose slightly in morning trade after falling for each of the previous four days, but it is unlikely to be a result of the morning's economic data. Results were mixed, with a 7 percent fall in U.S. housing starts and the largest increase in U.S. industrial production in four months.

"I think it's probably just a reversal of what we've seen over the past couple of days - of the flattening we've seen further up the curve," said Mark Cabana, short-term interest rates strategist at Bank of America Merrill Lynch in New York. In spite of the steepening on Friday, analysts expect the curve to continue to flatten in the long term. The trends that have driven up the short end and pushed down the long end this week are seen as unlikely to change soon. We think that in the near term the higher growth as a result of fiscal stimulus will result in a Fed a little bit more comfortable in their tightening path. And we dont necessarily feel like we should see any material adjustments to the longer-term growth outlook," Cabana said. "We think that will result in higher front-end rates and not necessarily flow through all the way up the curve." The benchmark 10-year government bond yield was last at 2.850 percent, above yesterday's close at 2.824 percent. The 2-year yield was up at 2.290 percent and the 30-year was was up at 3.079 percent.

March 16 Friday 10:30AM New York / 1430 GMT Price

US T BONDS JUN8 144-13/32 -0-13/32 10YR TNotes JUN8 120-80/256 -0-48/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.7475 1.7793 0.007 Six-month bills 1.9025 1.9472 0.002 Two-year note 99-236/256 2.2909 0.004 Three-year note 99-206/256 2.4431 0.016 Five-year note 99-234/256 2.6435 0.024 Seven-year note 99-200/256 2.7847 0.028 10-year note 99-32/256 2.8518 0.028 30-year bond 98-108/256 3.081 0.020

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 31.25 1.25

spread

U.S. 3-year dollar swap 26.25 0.50

spread

U.S. 5-year dollar swap 14.50 0.25

spread

U.S. 10-year dollar swap 3.75 0.00

spread

U.S. 30-year dollar swap -14.50 -0.25

spread

(Reporting by Kate Duguid; editing by Jonathan Oatis)