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TREASURIES-U.S. yield curve flattens as ECB refrains on rate-cut hint

Richard Leong

* ECB pledges to hold negative rates in 2020, sees risks

* U.S. yield curve flattens, reversing prior day's steepening

* U.S. jobless claims suggest solid jobs market after ADP miss

(Updates market action after U.S. data) NEW YORK, June 6 (Reuters) - The U.S. Treasury yield curve flattened on Thursday, as the European Central Bank committed to leaving interest rates alone into the first half of 2020, disappointing traders who had bet on a rate cut. The ECB also allowed banks to borrow at a rate just 10 basis points above its minus 0.4% deposit rate provided they beat the ECB's lending benchmarks in a new targeted longer-term refinancing operation, or TLTRO. The combined ECB moves were less aggressive than what some traders had expected, touching off selling in shorter-dated German government debt, which in turn spilled over into shorter Treasury maturities, traders and analysts said. Much of the yield curve flattened, coming off its steepest level in seven months the day before. The gap between two-year and 10-year yields narrowed by 2.6 basis points to 25.10 basis points. The U.S. curve steepening had been stoked by bets that Federal Reserve would ease monetary policies to combat an economic slowdown. Economic worries among investors have stemmed from trade tensions between the United States, and China and other U.S. trading partners. This week, a number of Fed policymakers have suggested the central bank is open to lower U.S. rates if the economy deteriorates. Interest rate futures implied traders see up to three rate cuts from the Fed by year-end. ECB President Mario Draghi said at a press conference that risks in the euro zone economy are tilting on the downside and headline inflation in the region will likely fall in the coming months. India's central bank as expected lowered domestic rates by a quarter point. At 9:48 a.m. (1348 GMT), benchmark 10-year Treasury yields were 1.80 basis points lower at 2.105%. U.S. yields hit session lows earlier Thursday in step with their German counterparts as investors had anticipated ECB hinting at cutting rates deeper into negative territory. German 10-year yields tumbled to record low of -0.240% before retracing to -0.220%. On the data front, the U.S. Labor Department said first-time filings for jobless benefits were unchanged last week, a sign of a solid labor market. Traders' view of a firm jobs market was rattled on Wednesday when payroll processor ADP's gauge of private jobs growth decelerated to 27,000 in May, its weakest in more than nine years. The Labor Department's payrolls report for May, due on Friday at 8:30 a.m. (1230 GMT), is seen as critical to whether the Fed would begin lower borrowing costs. Analysts polled by Reuters forecast non-farm payrolls likely grew by 185,000 last month, down from 263,000 in April, while the jobless rate likely held at 3.6%, the lowest since December 1969. June 6 Thursday 9:51AM New York / 1351 GMT Price

US T BONDS SEP9 154 19/3210YR TNotes SEP9 127-12/256 2/32Price Current NetYield % Change

(bps)

Three-month bills 2.28 2.3313 -0.011Six-month bills 2.1675 2.2218 -0.027Two-year note 100-134/256 1.8546 0.014Three-year note 100-222/256 1.8203 0.013Five-year note 100-166/256 1.863 0.000Seven-year note 100-220/256 1.9925 -0.00810-year note 102-100/256 2.107 -0.01630-year bond 105-200/256 2.596 -0.037YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 25.00 -2.5530-year vs 5-year yield 73.20 -3.95

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 5.00 0.25

spread

U.S. 3-year dollar swap 2.50 0.25

spread

U.S. 5-year dollar swap 2.00 1.00

spread

U.S. 10-year dollar swap -1.75 0.50

spread

U.S. 30-year dollar swap -27.25 1.00

spread

(Reporting by Richard Leong Editing by Chizu Nomiyama)