NEW YORK, Dec 30 (Reuters) - U.S. Treasury yields rose on Monday and the U.S. two-year, 10-year yield curve was the steepest in 14 months as investors prepared for the end of the year.
Benchmark 10-year yields held below recent support at around 1.95%, after weakening this month on improving risk appetite after the United States and China agreed to the first phase of a trade deal.
The yields were last 1.93%. They have backed up from 1.69% at the beginning of December and are up from a three-year low of 1.43% reached on Sept. 3.
The longer-dated notes also underperformed shorter-dated debt, sending the closely watched two-year, 10-year yield curve to its steepest level since October 2018 at 32 basis points.
The yield curve inverted in August, a signal that a recession may be likely in the next one to two years.
It has since steepened, however, on optimism that the U.S. economy won’t slow as much as expected and on expectations that the Federal Reserve is unlikely to continue lowering its benchmark interest rate, after cutting it three times this year.
Trading volumes are expected to be light before Wednesday’s New Year holiday.
Investors are also focused on whether there will be strains in the overnight funding markets, with banks expected to pare risk-taking as the year ends.
The New York Federal Reserve has been injecting liquidity into the repurchase agreement (repo) market to reduce the chance of funding stress, after the cost of overnight loans climbed as high as 10% in September, more than four times the Fed’s rate at the time.
The Fed’s repo operations, however, are made only with major dealers, with the banks in turn passing liquidity on to their clients. This could lead tp some clients struggling to raise funds over the year-end period if banks cut back lending.