February 28, 2018 / 4:37 PM / 3 months ago

TREASURIES-U.S. yield curve flattens further on Powell's optimistic outlook

    * Yield curve flattens further after Powell's upbeat
economic view
    * Month-end buying stokes demand for longer-dated Treasuries
    * Housing, factory data hint U.S. economic growth far from
robust 

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Feb 28 (Reuters) - The spread between short- and
longer-dated U.S. Treasury yields shrank further on Wednesday
after Federal Reserve Chairman Jerome Powell's upbeat view on
the economy raised speculation the U.S. central bank may raise
interest rates faster.
    Typical month-end buying to rebalance portfolios also fed
demand for longer-dated Treasuries, analysts said.
    Traders have piled into curve-flattening positions as the
Fed has ratcheted up key short-term borrowing costs even as
inflation has remained below policy-makers' 2-percent goal.
    The yield curve hit its flattest level in a decade in
January, raising concerns over whether the yield would
eventually invert when short-term yields run above longer-dated
ones.
    A curve inversion has often preceded previous U.S.
recessions.
    Many analysts and traders, however, do not expect the curve
to invert this year.
    "Probably at the end of the Fed's tightening cycle, we may
see the curve invert, but it won't be the end of this year,"
said Larry Milstein, head of agency and government trading at
R.W. Pressprich & Co. in New York. 
    Powell also downplayed concerns about a curve inversion. "I
don't look at the current yield curve situation as a problem,"
he said during the question-and-answer portion of his testimony
before the House Financial Services Committee.
    The curve has been flattening since Tuesday when Powell
acknowledged during the Q&A that the economy has strengthened
since December and he was confident inflation will rise.
    His comments raised bets the Fed might raise short-term
rates four times in 2018, one more than what policy-makers
projected in December. 
    Powell will appear before the Senate Banking Committee on
Thursday to complete his first semi-annual testimony before
Congress as Fed chief.
    At 11:17 a.m. (1617 GMT), the spread between five-year and
30-year yields was 48.05 basis points, tighter
than 49.85 basis points late on Tuesday, Tradeweb data showed.
    The two-year Treasury yield, which is sensitive
to traders' view on Fed policy, hit 2.286 percent, the highest 
since September 2008. It was last 2.270 percent, up a tad from
Tuesday.
    Longer-dated yields slipped on expectations that a faster
pace of Fed rate increases would cool U.S. inflation and
economic growth.
    Benchmark 10-year Treasury yield was 2.884
percent, down over 2 basis points on the day.
    A set of weaker data on Wednesday supported the view the
U.S. economy is not firing on all cylinders.
    The government revised lower its reading on economic
activity in the fourth quarter to 2.5 percent. A regional gauge
on U.S. Midwest factory activity fell more than forecast in
February, while pending home sales unexpectedly declined in
January.
February 28 Wednesday 11:19AM New York / 1619 GMT
                               Price                  
 US T BONDS MAR8               144-7/32     21/32     
 10YR TNotes MAR8              120-140/256  5/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.63         1.6595    -0.015
 Six-month bills               1.8175       1.8598    -0.013
 Two-year note                 99-246/256   2.2701    0.004
 Three-year note               99-126/256   2.4286    0.001
 Five-year note                99-212/256   2.662     -0.007
 Seven-year note               99-140/256   2.8218    -0.017
 10-year note                  98-216/256   2.8843    -0.024
 30-year bond                  97-64/256    3.1423    -0.033
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       61.20        -1.50     
 30-year vs 5-year yield       47.90        -1.80     
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        27.75        -0.25    
 spread                                               
 U.S. 3-year dollar swap        23.50        -1.00    
 spread                                               
 U.S. 5-year dollar swap        10.75        -0.50    
 spread                                               
 U.S. 10-year dollar swap        1.50         0.00    
 spread                                               
 U.S. 30-year dollar swap      -18.00         0.00    
 spread                                               
 
    

    
 (Reporting by Richard Leong
Editing by Susan Thomas)
  
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