April 20, 2018 / 7:09 PM / a year ago

TREASURIES-Bond selloff steepens yield curve, analysts see it as temporary

(Adds analyst comment, updates yields)

By Kate Duguid

NEW YORK, April 20 (Reuters) - The 10-year Treasury yield reached its highest level since March 21 as the bond selloff continued for a second day on Friday, driving the yield curve steeper after two weeks of flattening.

The move appears to reflect a technical shift in the market, rather than a jump in investor confidence in the U.S. economy or rising inflation. As such, analysts, regardless of whether they expect the curve to invert in 2018, believe the current steepening is a temporary move.

“If you look at the chart, you have to squint to see it,” Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments, said of the two-day counter-trend.

With the Federal Reserve raising short-term interest rates, “a flattening makes sense,” Tannuzzo added.

Rising interest rates, along with increased supply of Treasury debt, will prop up shorter-dated maturities, flattening the curve as the two-year, three-year and five-year note yields move up more quickly than 10-year and 30-year yields at the long end.

“We don’t feel that this yield curve flattening is a precursor to a recession,” said Eric Souza, senior portfolio manager at Silicon Valley Bank in San Francisco.

But, Souza added, the yield curve is likely to continue to flatten.

“In a normal rising rate environment, you would have a flat yield curve. We saw this recently in the 2004-2006 time frame,” Souza said.

The supply of Treasury notes is set to increase with auctions of the two-year, five-year and seven-year bonds next week. Tamping down prices at the front end will be the increase at auction of two-year fixed-rate debt to $32 billion, the most sold for this maturity in four years.

The two-year Treasury yield was last at 2.449 percent, above its last close.

Given the structural expectations for a flattening, analysts struggled to explain the 3.1 basis point move in the benchmark government note, and the selloff in bonds more generally.

“I think it has to do with funding issues, a reallocation based on repatriation of dollars,” said Lou Brien, market strategist at DRW Trading in Chicago. “I don’t think bonds are reacting to stocks, I don’t think they’re reacting to heightened inflation expectations.”

President Donald Trump’s administration has incentivized American companies to repatriate their cash. If a company that had been holding money abroad in the form of Treasuries did repatriate those funds, it may then use them to reinvest in the company, pay dividends or make shorter-term investments rather than to buy Treasuries again.

The 10-year Treasury yield was last at 2.945 percent, a monthly high, though still below the 2.957 percent of Feb. 21, which was the highest level since January 2014.

Reporting by Kate Duguid; Editing by Will Dunham

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