TREASURIES-US bonds rally with UK, Treasury to sell 5-year notes

Karen Brettell

* Treasuries rally in line with gilts

* Bonds briefly weaken on trade optimism

* Treasury to sell $41 bln five-year notes

NEW YORK, Nov 26 (Reuters) - U.S. Treasury yields fell alongside British government debt on Tuesday, while expectations that the Federal Reserve will keep rates on hold kept the yield curve near its flattest level in almost a month. U.S. bonds and British gilts rallied after British polls showed the ruling Conservatives as runaway favorites to win the Dec. 12 election with a pledge to implement Brexit and halt 3-1/2 years of political uncertainty. As were getting closer to the (British) election there are concerns about any spillover, said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. Short-dated debt, meanwhile, has been supported by expectations that the U.S. Fed will be on hold for the intermediate term, after cutting rates three times this year. Front-end rates continue to be parked here given that expectations are clear that the Feds going to be on hold, Lederer said. Fed Chairman Jerome Powell on Monday said that Fed officials have a favorable outlook for the U.S. economy founded on strong consumer spending, which is bolstered by a robust job market, increasing incomes and solid consumer confidence. Benchmark 10-year note yields were last 1.741%, down from 1.764% late Monday. The yield curve between two-year and 10-year notes was 14 basis points, after reaching 13 basis points on Monday, which was the flattest level since Oct. 30. Month- and year-end portfolio rebalancing was also seen as supporting demand for U.S. bonds. Treasury yields had risen overnight on fresh optimism that the United States and China will reach a deal to deescalate their trade war. China's Vice Premier Liu He, U.S. Trade representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin held a phone call on issues related to a phase one trade agreement on Tuesday, China's commerce ministry said.

The Treasury Department will sell $41 billion in five-year notes on Tuesday, the second sale of $113 billion in coupon-bearing supply this week. The government sold $40 billion in two-year notes to solid demand and will sell $32 billion in seven-year notes on Wednesday.

November 26 Tuesday 9:22AM New York / 1422 GMT

Price Current Net ChangeYield % (bps)Three-month bills 1.565 1.5931 -0.004Six-month bills 1.575 1.614 -0.003Two-year note 99-212/256 1.5879 -0.017Three-year note 100-28/256 1.587 -0.016Five-year note 99-134/256 1.6009 -0.015Seven-year note 99-156/256 1.6849 -0.01810-year note 100-20/256 1.7414 -0.02330-year bond 104-64/256 2.1811 -0.026


Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 1.00 2.00


U.S. 3-year dollar swap -3.50 0.75


U.S. 5-year dollar swap -6.00 0.50


U.S. 10-year dollar swap -8.75 1.00


U.S. 30-year dollar swap -35.50 0.75


(Editing by Kevin Liffey)