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TREASURIES-U.S. yield curve steepens as investors pare aggressive rate hike bets

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* U.S. 10-year yield hits highest since early June * U.S. 20-year, 30-year yields touch one-week highs * U.S. 5/30 yield curve steepens to 92.8 basis points (Adds new comment, Fed's Waller's remarks, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Oct 19 (Reuters) - The U.S. Treasury yield curve widened on Tuesday, as investors unwound flattening moves of the last few sessions after global central banks dampened expectations of near-term tightening that spilled over to the world's largest bond market. The steepening of the curve extended further after weaker than-expected U.S. housing data. The benchmark 10-year U.S. Treasury yield, meanwhile, rose to its highest in more than four months. U.S. fed fund futures, which track short-term Federal Reserve rate expectations, on Tuesday priced a 64% chance of a rate hike in July next year, down from 82% on Monday. Traders also priced a 46% chance of a U.S. rate rise by June next year, down from a more than 60% chance on Monday. The yield curve had flattened recently on expectations the Fed will tighten interest rates earlier than anticipated, pushing yields on the short end higher. The yield spread between the U.S. 5-year note and U.S. 30-year bond widened to 92.8 basis points on Tuesday. On Monday, the U.S. 5-year/30-year yield curve was at its flattest since late April 2020. "The steepening of the curve today is a moderation of Fed hike expectations," said Ben Jeffery, rates strategist, at BMO Capital in New York. "The Fed had said it will hike rates after it ends tapering but that runs counter to a June tightening that the market was pricing in. So we're probably finding a footing at a new range at this point, looking at 5s/30s between 85 and 100 basis points," he added. The U.S. 5-year yield, which reflects Fed tightening, has been on a tear the last two weeks, hitting its highest since February 2020 at 1.193%. The yield was last down at 1.1586%. Analysts said global central banks' dovish comments on Tuesday prompted some of the session's earlier steepening moves. Bank of France Governor Francois Villeroy de Galhau, a member of the European Central Bank's policy-setting Governing Council, said on Tuesday there is no reason for the ECB to raise rates between now and the end of 2022 as euro zone inflation is expected to fall back below the ECB's 2% target. Earlier, the Reserve Bank of Australia, in the minutes of its October policy meeting, said the outbreak of the Delta variant had interrupted the Australian economy's recovery. It reiterated its view of no hike in the 0.1% cash rate until 2024 given sluggish wages and inflation. Aside from the dovish central bank messages, U.S. housing starts unexpectedly fell in September amid persistent shortages of inputs and labor. U.S. starts dropped 1.6% to a seasonally adjusted annual rate of 1.555 million units last month. The U.S. housing report briefly weighed on long-dated yields, before they resumed gains. In afternoon U.S. trading, U.S. 10-year yields were last up nearly six basis points at 1.6407%. It hit a 4-1/2-months peak of 1.6440%. U.S. 20-year and 30-year yields rose to one-week highs and were last up at 2.0684% and 2.0897%, respectively. The long end hit their peaks after Federal Reserve Governor Christopher Waller said the Fed may have to adopt "a more aggressive policy response" if high inflation continues through the end of the year. October 19 Tuesday 2:19PM New York / 1819 GMT Price Current Net Yield % Change (bps) Three-month bills 0.055 0.0558 0.000 Six-month bills 0.06 0.0609 0.000 Two-year note 99-185/256 0.3932 -0.028 Three-year note 99-190/256 0.7124 -0.019 Five-year note 98-166/256 1.157 -0.003 Seven-year note 98-156/256 1.4613 0.021 10-year note 96-144/256 1.6302 0.046 20-year bond 94-240/256 2.0624 0.065 30-year bond 98-40/256 2.0833 0.066 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 14.75 -0.75 spread U.S. 5-year dollar swap 6.50 0.00 spread U.S. 10-year dollar swap 0.25 0.25 spread U.S. 30-year dollar swap -23.75 -0.75 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Susan Fenton and Gareth Jones)

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