December 13, 2016 / 8:36 PM / 3 years ago

TREASURIES-2-year yields hit highest since 2010; yield curve flattens after auction

* U.S. 2-year yield rises to six-year high
    * U.S. 30-year yields fall after strong auction
    * Yield curve flattens, reversing trend since U.S. election

 (Updates to afternoon trading, new throughout)
    By Dion Rabouin
    NEW YORK, Dec 13 (Reuters) - Shorter-dated U.S. Treasury
yields rose to their highest levels of the year on Tuesday, with
2-year notes touching over 6-year highs, ahead of an expected
increase in U.S. overnight interest rates at Wednesday's Federal
Open Market Committee meeting.
    Investors overwhelmingly expected the FOMC to announce a
rate hike on Wednesday, the first since rates were raised to
0.25-0.50 percent at its December 2015 meeting. That prompted
moderate selling, pushing yields of shorter-dated maturities to
new highs.
    The yield curve flattened after a strong 30-year Treasury
bond auction sent prices on the long bond into positive
territory and sank yields. Bond yields move inversely to their
    "The main theme has been a flatter curve with the front end
trading very heavy to the highest yields in a few years and the
long end just trying to hold in above the auction stop," said
Justin Lederer, Treasury analyst at Cantor Fitzgerald in New
    The 30-year bond auction was well bid as yield-hungry
investors snatched up $12 billion of supply, which sold at the
highest maturity since September 2014. 
    "A month ago the yield on the 30-year was 2.90 percent and
today we were up at 3.15 percent," said Lou Brien, market
strategist at DRW Trading in Chicago. "That's 25 basis points
more to sweeten the pot for the same paper that was auctioned a
month ago."
    The rebound in appetite for 30-year Treasuries came a day
after lackluster demand for $24 billion of 3-year notes and $20
billion of 10-year debt.
    Also on Monday benchmark U.S. 10-year yields touched more
than two-year highs above 2.50 percent, while 30-year bond
yields climbed to around 17-month peaks.
    Since Donald Trump's victory in the U.S. presidential
election on Nov. 8, longer-dated bonds including U.S. 30-year
Treasuries have fallen out of favor on bets of faster inflation
and a surge in federal spending and borrowing under a Trump
    Tuesday's price action after the auction reversed the
overall trend since the election, which had been longer-dated
Treasuries rising more than shorter-dated yields. 
    Benchmark U.S. 10-year note prices fell 1/32,
while the yield rose to 2.482 percent. On Monday, the yield hit
2.528 percent, its highest level since Sept. 29, 2014, according
to Reuters data.
    U.S. 30-year bonds rose 15/32. The yield was
3.138 percent, compared with 3.162 percent on Monday.
    U.S. two-year notes fell 2/32 in price to yield
1.174 percent.

 (Reporting by Dion Rabouin; Editing by Andrew Hay)
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