January 17, 2018 / 3:33 PM / in 6 months

TREASURIES-U.S. curve flattens as two-year yields hit nine-year high

    * Five-year, 30-year spread hits lowest point in over a
    * Two-year yields highest since 2008

    By Kate Duguid
    NEW YORK, Jan 17 - The U.S. yield curve flattened to a
decade-low spread between 5-year and 30-year yields and two-year
Treasury yields hit a nine-year high on Wednesday on
expectations the Federal Reserve will continue to tighten
monetary policy this year.
    This is "a classic tale of two markets. The front end of the
curve is responding to the Fed’s insistence on continuing to
hike rates while the longer end of the curve is responding to a
more benign global inflation environment," said Ian Lyngen, head
of U.S. rates strategy at BMO Capital Markets in New York.
    At 44.8 basis points, the spread between 5-year and 30-year
yields hit its lowest level since August 2007.
The margin between yields of short- and long-dated maturities
has compressed as investors price in the expectation that the
Fed will continue to raise U.S. overnight interest rates, even
as long-term inflation expectations have remained low.
    Two-year yields, which are the maturity most
sensitive to Fed interest rate hikes, have been rising as robust
economic data has affirmed the FOMC's hawkish sentiment. Last
Friday's stronger-than-expected core CPI report increased the
odds of a March rate hike, with the rate futures market pricing
in a more than 70 percent chance, according to the CME's
    The Fed's narrative is "that as long as financial conditions
are easy enough, they’re going to continue to push forward with
the process of normalization," said Lyngen.  
    As the continuing resolution, or stopgap funding bill, is
due to expire Friday, investors will be watching Congress to see
if it can put together a funding bill in time to avoid a U.S.
government shutdown. If a bill is passed, traders' focus will
move to the Treasury's refunding plans, and the first estimate
of fourth-quarter gross domestic product on Jan. 26. 
    Also in focus on Wednesday will be a speeches from Fed
officials. FOMC voter Cleveland Fed President Loretta Mester is
expected to deliver a hawkish message, while non-voter Chicago
Fed President Charles Evans is expected to be dovish. Dallas Fed
President Robert Kaplan, also a non-voter, will be watched to
see if he updates his expectation that three rates hikes in 2018
is the "base case."
    The Fed is also scheduled to deliver its Beige Book report
on Wednesday, which offers an overview of the current economic
landscape from each of the Fed's districts.
    At 9:39 a.m. (1439 GMT), 10-year Treasury yields
were 2.556 percent, above Tuesday's close at 2.544 percent. 
Two-year yields were 2.039 percent, after hitting
2.047 percent earlier in the day, its highest since September
    January 17 Wednesday 9:43AM New York / 1443 GMT
 US T BONDS MAR8               150-29/32    0-3/32    
 10YR TNotes MAR8              122-224/256  -0-28/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.4225       1.4475    0.002
 Six-month bills               1.6          1.6355    0.002
 Two-year note                 99-178/256   2.0349    0.017
 Three-year note               99-150/256   2.1436    0.017
 Five-year note                98-216/256   2.3738    0.019
 Seven-year note               98-120/256   2.4912    0.015
 10-year note                  97-100/256   2.5518    0.008
 30-year bond                  98-128/256   2.8246    -0.010
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        19.75        -0.25    
 U.S. 3-year dollar swap        19.00         0.25    
 U.S. 5-year dollar swap         5.50        -0.25    
 U.S. 10-year dollar swap        0.75         0.25    
 U.S. 30-year dollar swap      -16.50         1.50    

 (Reporting by Kate Duguid; Editing by Phil Berlowitz)
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