U.S. Markets

Yield curve flattest since 2007, consumer spending disappoints

NEW YORK (Reuters) - Longer-dated Treasury yields fell on Friday and the yield curve hit its flattest level in more than 10 years after U.S. consumer spending growth in May undershot analysts’ expectations.

FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 28, 2018. REUTERS/Brendan McDermid

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose only 0.2 percent last month, the Commerce Department reported. Data for April was also revised down to show spending rising 0.5 percent instead of the previously reported 0.6 percent jump.

Economists polled by Reuters had forecast spending gaining 0.4 percent last month.

The data came as U.S. consumer prices accelerated in the year to May, with a measure of underlying inflation hitting the Federal Reserve’s 2 percent target for the first time in six years.

The core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, rose 0.2 percent after a similar gain in April.

“While inflation is back to the 2 percent level on year-over-year core PCE, the spending aspect of tax reforms doesn’t seem to have come to fruition, all of which suggests that the curve is going to continue to grind flatter while the Fed pushes forward with at least a few more rate hikes,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

Benchmark 10-year notes gained 4/32 in price to yield 2.833 percent, holding just above a low of 2.822 percent reached on Thursday, which was the lowest since May 31.

The yield curve between two-year and 10-year notes US2US10=TWEB flattened to 30 basis points, the flattest level since 2007.

The European Central Bank is considering buying more long-dated bonds from next year to keep euro zone borrowing costs in check even after it stops pumping fresh money into the economy, sources told Reuters.

That could add an additional flattening pressure to U.S. and European yield curves.

Continuing concerns about tensions between the United States and its trading partners Trade concerns have boosted demand this week for safe haven debt as investors worried that tighter restrictions would reduce global economic growth.

The next major U.S. economic release will be next week’s employment report for June, which will be scoured for any indications of rising wage pressures.

The Fed is also due to release on Thursday minutes from its June policy meeting. Fed policymakers earlier this month said two additional rate hikes are expected by the end of this year, compared with one previously.

Editing by David Gregorio and Paul Simao