TREASURIES-U.S. 2-year yield soars to 19-month peak, curve flattens across the board

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* U.S. 5/30 yield curve flattest since March 2020 * U.S. 2/10 yield spread narrowest since August * U.S. 30-year yield falls to five-week low * U.S. 10-year yield slides to two-week trough * U.S. 5-year note auction shows strong demand (Adds 5-year note auction results, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Oct 27 (Reuters) - U.S. 2-year Treasury yields rose to fresh 19-month highs on Wednesday, flattening the yield curve, as the possible timing of the Federal Reserve's first interest rate rise came into tighter focus. A strong U.S. 5-year note auction added to overall bids in the Treasury market, pushing longer-dated yields lower. The note at the auction picked up a high yield of 1.157%, lower than the expected rate at the bid deadline, suggesting investors were seeking a lower premium for the 5-year note. The bid-to-cover ratio was 2.55, compared with an average of 2.37 over the last several auctions. In the run-up to the Fed's policy meeting next week, market focus has moved beyond pricing the central bank's likely taper of asset purchases and onto the timing of the first rate rise since December 2018. Rising oil prices and inflation expectations have fed into that pricing, even though Fed Chair Jerome Powell said last week it wasn't time to raise rates just yet. Bank of England Governor Andrew Bailey, on the other hand, signalled last week that the BoE would act to curb inflation expectations. Futures markets now fully price in a 15 basis point BoE rate hike on Nov. 4 and another 25 basis point move in December. "The BoE has people questioning if the Fed can really hold off that long especially with the inflation backdrop that we have and the continued supply chain pressures," said Zachary Griffith, macro strategist at Wells Fargo. "I think that's what making people re-assess what's realistic and how committed the Fed can be to its average inflation targeting that is kind of untested," he added. The Fed is widely expected to begin tapering its $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities next month, but Fed funds futures already priced a 70% chance of a June rate hike on Tuesday. U.S. 2-year yields spiked to 0.511%, the highest since March 2020, and were last at 0.4911%. The 5-year yield -- another segment of the curve that's also sensitive to interest rate expectations -- was last down 4 basis points at 1.1450%. It hit 1.2520% on Monday, the highest since February 2020. U.S. 10-year yields dropped to a two-week low of 1.527% and were last at 1.5361%. That, in turn, narrowed the spread between the 2- and 10-year yields to 103 basis points, the flattest since late August. The 30-year slid to a five-week trough of 1.9486% . It was last down 10 basis points at 1.9507%. The spread between U.S. 5-year notes and 30-year bonds narrowed to as low as 77.8 basis points, the tightest gap since March 2020. The U.S. 5-year inflation breakeven rate, meanwhile, which reflects market-based inflation expectations over the next five years, hit north of 3%,, the highest since at least January 2004. Ten-year breakevens were at the highest since May 2006 . October 27 Wednesday 1:33PM New York / 1733 GMT Price Current Net Yield % Change (bps) Three-month bills 0.055 0.0558 0.000 Six-month bills 0.0625 0.0634 0.000 Two-year note 99-198/256 0.4891 0.005 Three-year note 99-150/256 0.7665 0.002 Five-year note 98-180/256 1.1467 -0.034 Seven-year note 99-4/256 1.3996 -0.059 10-year note 97-104/256 1.5361 -0.082 20-year bond 97 1.933 -0.098 30-year bond 101-28/256 1.9507 -0.100 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 15.75 -1.50 spread U.S. 3-year dollar swap 16.25 0.50 spread U.S. 5-year dollar swap 8.00 -0.75 spread U.S. 10-year dollar swap 1.75 -1.25 spread U.S. 30-year dollar swap -20.50 -1.25 spread (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Sujaya Rao in London, Tom Westbrook and Vidya Ranganathan in Singapore; Editing by Kirsten Donovan)

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