TREASURIES-Yields curve steepens on profit taking

Tue Aug 26, 2014 3:24pm EDT

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(Recasts with yield curve, adds quote, details, updates prices)
    * Yield curve steepens from 5-1/2 year lows
    * Most prices steady, after gaining earlier on European bond
rally
    * Ukraine tensions keep safety bid for U.S. debt
    * Treasury sells $29 bln in two-year notes to solid demand

    By Karen Brettell
    NEW YORK, Aug 26 (Reuters) - Most U.S. Treasuries were
little changed on Tuesday, though prices on 30-year bonds fell
as investors unwound some bets that the yield curve would
continue to flatten.
    Trading volumes were light with many traders out for
vacation before a long U.S. holiday weekend.
    The yield curve between five-year notes and 30-year bonds
steepened modestly after falling to five-and-a-half year lows on
Monday on expectations that the European Central Bank may ease
monetary policy as soon as next week.
    "There has been recent flattening of the curve to the
narrowest levels since January 2009, and some people are
unwinding that trade," said Justin Lederer, an interest rate
strategist at Cantor Fitzgerald in New York.
    The yield curve steepened to 149 basis points
, up from a low of  143 basis points on Monday.
    Most direction this week has been set by comments by ECB
President Mario Draghi on Friday that the bank was prepared to
respond with all available tools if euro zone inflation drops
further. Investors took this to mean the ECB could start an
asset purchase program or other stimulus measures.
 
    European bond yields fell to record lows on Tuesday, helping
Treasuries rally earlier in the day. The next ECB policy meeting
is on Sept. 4.
    "It's tough for Treasuries to sell off here given what's
going on in Europe," said Gennadiy Goldberg, interest rate
strategist at TD Securities in New York.
    Benchmark 10-year Treasuries were unchanged in
price to yield 2.39 percent.
    Concern over tensions in Ukraine is also helping maintain a
safety bid for U.S. Treasuries.
    Ukraine released a video of captured Russian soldiers on
Tuesday, sharply escalating a dispute over Moscow's alleged
backing for separatist rebels in the east of the former Soviet
republic. 
    Europe is taking center stage as the U.S. economic calendar
is relatively light until the release of August's employment
report on September 5. The Federal Reserve is then due to meet
on September 15 and 16.
    The Treasury sold $29 billion in two-year notes to solid
demand on Tuesday, the first in $93 billion in new
coupon-bearing supply this week. 
    The U.S. government will sell $35 billion in five-year notes
on Wednesday and $29 billion in seven-year notes on Thursday, as
well as $13 billion in two-year floating-rate notes on
Wednesday.

 (Editing by Meredith Mazzilli and Chizu Nomiyama)
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