TREASURIES-U.S. yield curve steepens after dovish signals from central banks

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. 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. Fed tightening in August was at an 80% chance on Tuesday, down from 100% on Monday. The yield curve had flattened amid expectations the Fed will tighten interest rates, 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 90 basis points on Tuesday, On Monday, the U.S. 5-year/30-year yield curve was at its flattest since late April 2020. The U.S. 5-year yield, which has come to reflect Fed rate hike expectations, has been on a tear the last two weeks, hitting its highest since February 2020 at 1.193%. The yield was last down 1 basis point at 1.1488%. Analysts said global central banks' dovish comments on Tuesday prompted some of the 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 in the session, the Reserve Bank of Australia, in the minutes of its October policy meeting, said the outbreak of the Delta variant of COVID-19 had interrupted the Australian economy's recovery. It reiterated its view of no hike in the 0.1% cash rate until 2024 given sluggishness in 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 that are crimping the housing market and overall economic activity. 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. "The housing sector, though on the upswing, has recently stumbled," wrote Stan Shipley, fixed income strategist, at Evercore ISI in a report after the data. But "they are still well above long-term demographic demand. Most forward-looking metrics on housing suggest it should turn up in Q4 of 2021 and H1 of 2022," he added. In late morning U.S. trading, U.S. 10-year yields were last up 3.4 basis points at 1.6161%. U.S. 30-year yields were also higher, up nearly 6 basis points at 2.0711%. October 19 Tuesday 10:35AM New York / 1435 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 99-184/256 0.3953 -0.026 Three-year note 99-194/256 0.7071 -0.024 Five-year note 98-176/256 1.1488 -0.011 Seven-year note 98-174/256 1.4505 0.010 10-year note 96-176/256 1.6161 0.032 20-year bond 95-40/256 2.0485 0.052 30-year bond 98-104/256 2.0719 0.055 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 16.25 0.75 spread U.S. 3-year dollar swap 15.75 0.25 spread U.S. 5-year dollar swap 6.75 0.25 spread U.S. 10-year dollar swap 0.25 0.25 spread U.S. 30-year dollar swap -23.50 -0.50 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Susan Fenton)