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

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(Adds dropped letter in first sentence) * U.S. 5/30 & 10/30 yield curves flattest since March 2020 * U.S. 2/10 yield spread sees biggest drop in 19 months * U.S. 30-year yield falls to five-week low * U.S. 10-year yield slides to 12-day trough * U.S. 5-year note auction shows strong demand By Gertrude Chavez-Dreyfuss NEW YORK, Oct 27 (Reuters) - The U.S. 2-year Treasury yield rose to a 19-month high on Wednesday, occasioning the sharpest flattening of one yield curve yardstick since the pandemic started amid heightened anticipation of a Federal Reserve interest rate rise next year. U.S. 10-year yields dropped to a two-week low of 1.52% and were last at 1.5378%. The widely watched spread between the 2- and 10-year yields fell to 103.7 basis points, from 116.4, the biggest point contraction since March 27, 2020, and the flattest since late August. 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. A strong U.S. 5-year note auction helped demand in much of the Treasury market, pushing longer-dated yields lower. The note at the sale picked up a high yield of 1.157%, lower than the expected rate at the bid deadline, suggesting investors were seeking a lower premium. The bid-to-cover ratio was 2.55, compared with an average of 2.37 over the last several auctions. Rising oil prices and inflation expectations have fed in to that pricing, even though Fed Chair Jerome Powell said last week it was not time to raise rates just yet. The Fed could still be a step behind the Bank of England, whose governor, Andrew Bailey, 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's making people reassess 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 in a 70% chance of a June rate hike on Tuesday. U.S. 2-year note yields spiked to 0.5290%, the highest since March 2020, and were last at 0.4970%. The 5-year yield - another segment of the curve that is 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. The 30-year slid to a five-week trough of 1.932% . 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 average inflation expectations over the next five years, toyed with 3%,, the highest since at least January 2004. Ten-year breakevens were at the highest since May 2006 . October 27 Wednesday 4:13PM New York / 2013 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 99-194/256 0.497 0.013 Three-year note 99-152/256 0.7638 0.000 Five-year note 98-186/256 1.1417 -0.039 Seven-year note 99 1.402 -0.057 10-year note 97-100/256 1.5378 -0.080 20-year bond 97 1.933 -0.098 30-year bond 101-48/256 1.9472 -0.104 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 15.50 -1.75 spread U.S. 3-year dollar swap 16.25 0.50 spread U.S. 5-year dollar swap 8.25 -0.50 spread U.S. 10-year dollar swap 2.50 -0.50 spread U.S. 30-year dollar swap -19.75 -0.50 spread (Reporting by Gertrude Chavez-Dreyfuss in New York Additional reporting by Sujaya Rao in London, Tom Westbrook and Vidya Ranganathan in Singapore Editing by Kirsten Donovan and Matthew Lewis)

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