Tags: treasury | bond | yield spread | federal reserve outlook

Treasury Yield Spread Narrowest Since 2010 After Fed Outlook

Thursday, 20 March 2014 10:14 AM

The difference between yields on 10- and 30-year U.S. Treasurys narrowed to the least since 2010 after the Federal Reserve indicated interest rates may rise faster than anticipated while the pace of growth is moderate.

Two-year notes fluctuated after dropping the most Wednesday since 2011 as Fed Chair Janet Yellen suggested interest rates may rise by the middle of next year. A report showed jobless claims remained near the lowest in almost four months. The yield on the 10-year note last week declined the most since January amid turmoil in Crimea.

“The bond doesn’t move off Fed policy,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “It moves off inflation, growth and demand. The rest of the curve is a combination of fed funds and Fed policy. The effect of what you heard yesterday has more of an impact on the 10-year than the bond.”

The benchmark 10-year yield was little changed at 2.77 percent as of 9:39 a.m. in New York following Wednesday’s increase of 10 basis points, or 0.10 percentage point, according to Bloomberg Bond Trader prices. The price of the 2.75 percent security due in February 2024 was at 99 25/32.

The yield spread over Group of Seven peers was 0.58 percentage point after rising to 0.62 percentage point Wednesday, the most since April 2010.

The two-year note yield was little changed at 0.43 percent after gaining seven basis points Wednesday, the most since 2011. Five-year yields were at 1.71 percent after touching 1.75 percent Wednesday, the highest since Jan. 10.

Labor Market

The gap between the yields on the 10-year note and the 30- year bond narrowed to as little as 85.6 basis points, the least since May 2010.

“Growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions,” the Fed said. Even so, “there is sufficient underlying strength in the broader economy to support ongoing improvement in labor-market conditions.”

Jobless claims increased by 5,000 to 320,000 in the week ended March 15, a Labor Department report showed in Washington. The median forecast of 51 economists surveyed by Bloomberg called for an increase to 322,000. The four-week average, a less volatile measure, fell to 327,000, the lowest level since late November.

‘Flattening Trades’

As the economy improves, the Fed is slowly scaling back the large-scale bond purchases that have expanded its balance sheet to a record $4.18 trillion.

“As you look toward a better economic environment and more Fed tightening, you do see more flattening trades,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The 10-year that had been held down by global developments was free from those for a day or two. The 30-year has been anchored by good sponsorship of the long end of the curve.”

The Fed said it will look at a wide range of data in determining when to raise its benchmark interest rate from zero, dropping a pledge tying borrowing costs to a 6.5 percent unemployment rate.

Benchmark U.S. government debt fell this week as Ukraine ceded control of Crimea to Russia as tensions remained high over Russian moves to annex the Black Sea peninsula.

Demilitarizing Crimea “is the best way to de-escalate the situation,” Andriy Parubiy, head of Ukraine’s National Security Council, told reporters in Kiev.

German Chancellor Angela Merkel said the European Union won’t rush to impose economic sanctions on Russia for the annexation of Crimea, reflecting concerns that trade curbs would damage Europe’s tentative recovery.

Economists and strategists in a Bloomberg News survey lowered their forecasts for how much the 10-year yield will increase at year-end. The rate will rise to 3.35 percent in the fourth quarter, according to a survey conducted March 7-12, down from 3.40 percent in a survey last month.

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The difference between yields on 10- and 30-year U.S. Treasurys narrowed to the least since 2010 after the Federal Reserve indicated interest rates may rise faster than anticipated while the pace of growth is moderate.
treasury,bond,yield spread,federal reserve outlook
Thursday, 20 March 2014 10:14 AM
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