February 28, 2018 / 8:12 PM / 10 months ago

TREASURIES-U.S. yield curve flattens more on Powell's upbeat view

    * U.S. Treasuries on track for another losing month in
February
    * U.S. 2-year yield reaches highest since Sept 2008
    * Month-end buying, choppy stock market feed bond demand 
    * Housing, factory data hint U.S. economic growth far from
robust 

 (Updates market action, adds Feb return graphic)
    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 optimistic
outlook on the economy raised bets the U.S. central bank may
raise interest rates faster.
    Typical month-end buying to rebalance portfolios and choppy
trading on Wall Street also fed demand for longer-dated
Treasuries, analysts said.
    Wednesday's yield drop reduced Treasuries' losses in
February following a dismal January when it recorded 1.36
percent loss, which was the steepest drop since November 2016,
according to an index compiled by Barclays and Bloomberg
.
    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.
    NEW FED CHIEF
    The curve has been flattening since Tuesday when Powell said
 during his Q&A that the economy has strengthened since December
and he was confident inflation will rise.
    His comments strengthened 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.
    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 2.262 percent, down 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.
    The benchmark 10-year Treasury yield was 2.870
percent, down nearly 4 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 3:00PM New York / 2000 GMT
                               Price                  
 US T BONDS MAR8               144-14/32    28/32     
 10YR TNotes MAR8              120-164/256  8/32      
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.63         1.6595    -0.015
 Six-month bills               1.8125       1.8547    -0.018
 Two-year note                 99-250/256   2.262     -0.004
 Three-year note               99-134/256   2.4176    -0.010
 Five-year note                99-226/256   2.6502    -0.019
 Seven-year note               99-172/256   2.802     -0.037
 10-year note                  98-248/256   2.8697    -0.038
 30-year bond                  97-132/256   3.1283    -0.047
         YIELD CURVE           Last (bps)   Net       
                                            Change    
                                            (bps)     
 10-year vs 2-year yield       60.40        -2.20     
 30-year vs 5-year yield       47.80        -2.00     
   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        23.75        -0.75    
 spread                                               
 U.S. 5-year dollar swap        10.75        -0.50    
 spread                                               
 U.S. 10-year dollar swap        1.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -18.25        -0.25    
 spread                                               
 

    
 (Reporting by Richard Leong
Editing by Susan Thomas)
  
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