April 18, 2018 / 6:50 PM / a year ago

TREASURIES-Yield curve flattens further in range-bound trade

(Updates news, yields, chart)

By Kate Duguid

NEW YORK, April 18 (New York) - Trading across U.S. government bond maturities was range-bound on Wednesday, as the yield curve nevertheless continued to flatten for the ninth consecutive market day.

The gap between short- and long-dated Treasuries is at its lowest in over a decade, which suggests the market anticipates the Federal Reserve will continue to raise interest rates in 2018.

“The short end is intent on Fed tightening,” said Mary Ann Hurley, vice president, fixed income trading at D.A. Davidson in Seattle. That is in spite of the current skepticism about the long-term health of the U.S. economy, reflected in falling 10- and 30-year yields.

The Fed’s plan to continue hiking rates was born out by Wednesday’s Beige Book report, which said that robust business borrowing, rising consumer spending and tight labor markets indicated the U.S. economy remains on track for continued growth.

The spread between two- and 10-year Treasuries is at 42.9 basis points, and the spread between five- and 30-year yields is at 31.5 basis points, both below Tuesday’s close.

A sell-off at the front end of the curve caused two-year Treasury yields to rise from 2.386 percent at Tuesday’s close to 2.427 on Wednesday afternoon. That move drove the flattening trend of the yield curve, as 30-year yields rose just 1 basis point.

The bigger moves at the front end were still minor, however, despite gains on Wall Street on strong corporate earnings. Bond yields are correlated with equity prices, as money will move out of fixed income when investments in stocks become more attractive. But despite the stock market’s move higher this week, yields have not risen proportionally.

“The reaction in the bond market seems to be a lot more muted relative to the big moves we’ve seen in the equities rally in the past few sessions,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.

The S&P 500 Index was up 11 basis points on Wednesday morning, bolstered by strong earnings from Morgan Stanley among others.

“I think bonds are resisting selling off too much because of the fact that global bond yields are still very low and that spread between Bunds and Treasuries is close to its widest levels, and that’s anchoring 10-year Treasury yields somewhat,” said Rajappa.

The spread between U.S. and German benchmark government bonds is -232.40 basis points, near the multi-year low of -237.30 hit on March 16. “We really need to see a rise in global yields for Treasury yields to rise meaningfully from here,” said Rajappa.

The benchmark government bond was last at 2.858 percent, above its last close. (Reporting by Kate Duguid Editing by Susan Thomas)

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