TREASURIES-U.S. yields rise as jobless claims, inflation in focus; curve flattens again

By Gertrude Chavez-Dreyfuss NEW YORK, Oct 28 (Reuters) - U.S. Treasury yields rose on Thursday, tracking European bonds, as investors shrugged off weaker-than-expected U.S. economic growth data and focused instead on the inflation components of the report, as well as a solid jobless claims number. U.S. yield curves flattened again amid heightened anticipation of a rate hike by the Federal Reserve next year, with the gap between 5-year and 30-year yields narrowing to 73.4 basis points, its tightest since March 2020. Another key yield curve showing the spread between 2-year and 10-yr yields was also flatter on the day. That spread fell below 100 basis points for the first time since early August. The spread was last at 102.6 basis points. The weak U.S. gross domestic product report, which showed that the world's largest economy grew at a slower-than-expected 2.0% annualized rate last quarter, had little impact on U.S. yields. The soft GDP figure, the weakest since the second quarter of 2020, was offset by continued improvement in U.S. jobless claims, which dropped 10,000 to a seasonally adjusted 281,000 last week, the lowest level since mid-March 2020. It was the third straight week that claims remained below the 300,000 threshold. "The Treasury market has discounted the weak GDP release and focused on the GDP and core PCE deflators, which are improving," said Stan Shipley, fixed income strategist at Evercore. The GDP deflator measures changes in the prices of U.S. goods and services and helps analysts compare the levels of yearly real economic activity. The core PCE deflator, on the other hand, is a gauge of domestic inflation. "People are also looking at the jobless claims numbers and saying that we could actually get a good jobs report next week," Shipley added. The U.S. GDP number did little to change market expectations of a Fed lift-off in the summer next year. Fed funds futures have priced in a more than 80% chance of a rate hike in June 2022, fully pricing that scenario by July In morning U.S. trading, the benchmark U.S. 10-year yield was up nearly 3 basis points at 1.5563%. U.S. 2-year yields hit a fresh 19-month high of 0.5640%, and were last up 3 basis points at 0.5207%. The U.S. 5-year yield, another part of the curve that is sensitive to Fed rate expectations, was up 3 basis points at 1.1799%. Overall, Treasury market moves were in line with European bonds. Short-dated government bond yields jumped between four and five basis points in the European session, with Germany's two-year Schatz yield hitting a 14-month high of -0.599% . In a sign of market uncertainty, the U.S. 20-year yield is now higher than that of 30-year bonds. U.S. 20-year yields were last up 3.4 basis points at 1.9613%, while those on the 30-year was up 1 basis point 1.9514%. October 27 Wednesday 7:35PM New York / 2335 GMT Price Current Net Yield % Change (bps) Three-month bills 0.055 0.0558 0.000 Six-month bills 0.06 0.0609 -0.002 Two-year note 99-189/256 0.5069 0.016 Three-year note 99-144/256 0.7746 0.011 Five-year note 99-208/256 1.1637 0.027 Seven-year note 98-244/256 1.4092 0.017 10-year note 97-84/256 1.5448 0.016 20-year bond 96-240/256 1.9369 0.011 30-year bond 101-28/256 1.9507 0.009 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 16.00 0.50 spread U.S. 3-year dollar swap 16.75 0.75 spread U.S. 5-year dollar swap 8.25 -0.25 spread U.S. 10-year dollar swap 2.25 0.00 spread U.S. 30-year dollar swap -19.75 0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci)