* ISM U.S. factory prices paid index highest since May 2011
* Further yield curve flattening is expected to resume
(Updates market action, adds quotes)
By Richard Leong
NEW YORK, Feb 1 (Reuters) - U.S. Treasury yields rose on Thursday as some investors reduced curve-related bets that earned profits last month tied to expectations the Federal Reserve would raise short-term interest rates further due to an improving economy.
The Treasuries market started February on its back foot following its worst month since November 2016. They produced nearly a 1.4 percent loss , according to an index compiled by Bloomberg and Barclays.
The spread between longer-dated yields and short-dated ones also contracted to the tightest level in over a decade on Wednesday after the U.S. Treasury Department favored selling more short-dated debt than longer-dated issues to finance the projected rise in its budget deficit.
"You are seeing more profit-taking on the curve-flattener trade," said Mike Lorizio, head of Treasuries trading at Manulife Asset Management in Boston.
The spread between five-year and 30-year Treasury yields widened to 43 basis points, a day after it touched nearly 41 basis points, a level not seen since August 2007, according to Tradeweb. On the other hand, Lorizio expected the curve-flattening move to resume once the profit-taking subsides.
"Further flattening of the curve seems inevitable with the supply coming and more Fed rate hikes," he said.
The Treasury said on Wednesday it planned faster growth in two-year and three-year debt issuance versus the rise in longer-dated supply.At 11:43 a.m. (1643 GMT), benchmark 10-year Treasury yields were up over 2 basis points at 2.744 percent. They reached a near four-year peak at 2.754 percent on Wednesday, Reuters data showed.
The five-year yield reached 2.556 percent, the highest since April 2010, while the two-year yield touched 2.173 percent, the highest since September 2008.
On the data front, the Institute for Supply Management said its U.S. manufacturing sector prices paid index rose to 72.7 in January, which was the highest since May 2011, suggesting inflation is gathering momentum. February 1 Thursday 11:44AM New York / 1644 GMT
PriceUS T BONDS MAR8 147-5/32 -0-21/3210YR TNotes MAR8 121-108/256-0-40/25
6
PriceCurrent Net
Yield % Change
(bps)Three-month bills 1.4451.47040.005Six-month bills 1.6051.6405-0.024Two-year note 99-178/256 2.15690.012Three-year note 99-36/2562.30280.014Five-year note 99-60/2562.53920.013Seven-year note 98-212/256 2.68490.02210-year note 95-200/256 2.74450.02430-year bond 95-176/256 2.969 0.028
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps) U.S. 2-year dollar swap19.25 0.50spread U.S. 3-year dollar swap18.75 0.50spread U.S. 5-year dollar swap 8.25 1.00spread U.S. 10-year dollar swap3.00 0.25spread U.S. 30-year dollar swap-12.25 0.25spread
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ U.S. yield curve flattest in a decade Government bond returns 2017 Worst month for bond markets since late 2016 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>(Reporting by Richard Leong Editing by Chizu Nomiyama)
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