December 6, 2018 / 4:18 AM / 5 days ago

TREASURIES-U.S. yield curve flattens further as Treasury market reopens

SINGAPORE, Dec 6 (Reuters) - Spreads between two- and 10-year U.S. Treasury yields tightened towards their narrowest in more than a decade in Asian hours on Thursday as government bond trade reopened following a U.S. financial market holiday.

The difference between the two-year Treasury yield and the 10-year yield contracted to 10.1 basis points versus 11.7 bps on Tuesday, continuing a shift in the shape of the curve that started earlier this week and has spooked investors. The spread is now near the narrowest it has been since mid-2007.

U.S. stock and bond markets were closed on Wednesday for a national day of mourning for former U.S. President George H.W. Bush, who died on Friday.

The flattening in the 2-10-year part and inversion in the short-end of the curve have rattled global equity markets as investors fret about a slowdown in the U.S. economy and the impact that would have on the strong U.S. dollar. The S&P index has fallen 2.1 percent so far this week. U.S. equity futures were down 1.4 percent in Asia on Thursday. The MSCI Asia index was down 1.5 percent at 151.65.

Ten-year bond yields were at to 2.892 percent on Thursday, down from their Tuesday close of 2.923 percent.

They have fallen more than 20 bps over the past month on concerns about a global economic slowdown and dovish comments from the Federal Reserve officials, which spurred expectations the central bank may be near the end of its rate hike cycle.

The curve between three-year and five-year notes inverted for the first time since 2007 on Monday and was last at minus 2.1 bps on Tuesday.

The 3-10-year spread narrowed to 10.6 bps on Tuesday.

However, some analysts believe the market’s concerns about a recession may be overstated.

“I don’t think the yield inversions point to a recession in the near term...the lag between a technical recession and the inversion of the yield curve is usually about two years,” said Ray Attrill, head of currency strategy at NAB.

Attrill said the curve between the U.S. 3-month treasury bill and the 10-year treasury bond yields is a much better predictor of recession and remains a long way from inverting.

While the Fed is widely expected to hike rates by 25 bps in December, its fourth rate hike this year, investors are currently pricing in only one more hike in 2019. (Reporting by Vatsal Srivastava; Editing by Sam Holmes)

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