Investors drove the U.S. yield curve to its flattest in 16 months on Wednesday as they snapped up higher yielding long-dated Treasury debt on the view economic recovery was fading fast.
Mild profit-taking weighed lightly on the intermediate sector of the curve.
The Treasury's auction of $36 billion five-year notes drew solid demand, traders said, setting a record-low yield.
The ratio of bids offered to those accepted was 2.83 with 58.31 percent of the bids accepted at a high yield of 1.374 percent. John Briggs, U.S. Treasury strategist at RBS Securities in Stamford, Conn., dubbed the auction results "quite acceptable."
This week's supply of new securities ends on Thursday with the Treasury's auction of seven-year notes, traders noted.
While profit-taking in intermediate-term securities weighed lightly on the market on Wednesday afternoon, another spate of weak economic data limited selling.
Poor data on durable goods orders and new home sales echoed other indications of a decelerating economy. The yield spread between two- and 10-year Treasuries narrowed to below 200 basis points for the first time since April 2009.
Slowing economic growth means there will be little inflationary threat to longer-dated Treasuries so investors are buying them to get the somewhat higher yields they offer. The yield curve on U.S. Treasuries shows the relation between interest rates and time to maturity. The yield curve is a graph of Treasury yields for maturities ranging from the shortest to the longest.
The poor outlook for the U.S. economy prompted the Federal Reserve to begin buying Treasuries again recently, underpinning government bonds with a guaranteed flow of official cash, at least as long as the data continues in the weak vein of the durables report.
"It's flattening, flattening and rallying," said Suvrat Prakash, U.S. interest rate strategist with BNP Paribas in New York. "Now we're getting a lot of disastrous numbers."
The closely watched 2/10-year segment of the yield curve flattened as far as 194 basis points.
The drop through 200 basis point marked a break of initial support, as did 198 basis points. The next chart support at 193.5 basis points appeared to be holding. Beyond that analysts are watching 188.5 basis points.
The flattening was in line with the broader rally in longer-dated bonds.
On Wednesday, the benchmark 10-year yield fell as far as 2.42 percent, the lowest since late January 2009.
Later, the market pulled back from its biggest gains as traders prepared for a $36 billion auction of five-year notes at 1 p.m.
The 10-year note was last up 9/32 in price, yielding 2.45 percent.
The 30-year Treasury rallied more than a point at the day's highs as investors continued to extend their grab for safe yields.
The long bond was last up 28/32, yielding 3.52 percent. During the rally, the 30-year yield dropped as far as 3.46 percent, the lowest since March 2009.
Long bond out-performance was also evident on the yield curve, with the 2/30-year segment already at its flattest since September 2009 and on the verge of a break below 300 basis points for the first time in 16 months.
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