January 7, 2020 / 8:29 PM / 13 days ago

TREASURIES-Yield curve steeper on decent U.S. data; TIPS lifted

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By Kate Duguid

NEW YORK, Jan 7 (Reuters) - The U.S. yield curve was steeper on Tuesday in the wake of good economic data, while 10-year Treasury Inflation-Protected Securities real yields moved back above zero and five-year TIPS rose, though remained in negative territory.

The U.S. trade deficit fell to a more than three-year low in November as imports declined, weighed down by the Trump administration’s trade war with China. Exports rebounded, suggesting the economy ended 2019 on solid footing.

“The trade balance was a lot more than anticipated, so that has positive implications for GDP being revised higher,” said Mary Ann Hurley, vice president, fixed income trading at D.A. Davidson.

An Institute for Supply Management report on the U.S. services sector showed its Purchasing Managers Index at 55.0 in December, above expectations and the highest since August. That comes after an ISM manufacturing index last week fell short of expectations.

The 10-year yield was last up 1.4 basis points at 1.827%, with the two-year yield roughly flat at 1.547%. A steeper yield curve signals improving sentiment about the economy but low expectations the Federal Reserve will raise interest rates.

The yield curve, measured as the spread between two- and 10-year yields was last at 27.7 basis points, up from its last close at 26.2.

The positive economic news led yields higher following big drops last week on heightened tension between Iran and the United States. Mideast risks rose after a top Iranian military commander was killed by a U.S. air strike, which pushed investors into safe-haven assets, propping up Treasury prices.

The Washington-Tehran conflict has also driven up oil prices, and with them, the price of inflation-protected securities. Prices of both fell on Tuesday as concerns about the conflict moderated.

Five-year TIPS real yields remained in negative territory for the fourth trading day, falling on Jan. 3 to the lowest level since April 2017. Meanwhile, 10-year TIPS traded above zero after going negative on Jan. 3 for the first time since September 2019.

“I don’t think it’s that surprising that real yields have gone negative,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.

With the Fed having lowered overnight rates to just over 1.5%, anytime they approach their inflation target of 2%, that should produce negative real yields, said Hill.

On Tuesday afternoon the Treasury Department sold $38 billion of three-year notes to average demand. Direct bidders took 16.7% of the offering, indirect bidders took 47.5% and dealers took 35.8%. (Reporting by Kate Duguid; Editing by Grant McCool and Lisa Shumaker)

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