Treasury yield curve steepens as Yellen talks of accommodation

The Treasury market yield curve steepened after Federal Reserve Chair Janet Yellen said a “high degree” of accommodation remains warranted, tempering expectations for an acceleration of interest-rate increases.

The difference in yields between five- and 30-year securities increased to about 175 basis points, or 1.75 percentage points, as investors bet moderate growth will prompt the central bank to stick with forecasts for increases next year. Benchmark 10-year notes were little changed after the U.S. auctioned $24 billion of the securities. It will sell $16 billion in 30-year bonds tomorrow.

“Yellen was able to restate the Fed’s commitment to easing and sidestep being pigeonholed into providing a timeline, and that has helped the curve steepen, along with the setup for tomorrow’s 30-year bond auction,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The bias is for a steeper curve into tomorrow.”

Five-year yields dropped three basis points to 1.65 percent at 2:18 p.m. in New York, based on Bloomberg Bond Trader data. They touched 1.63 percent, the lowest since April 17. The price of the 1.625 percent note due in April 2019 gained 5/32, or $1.56 per $1,000 face amount, to 99 29/32.

The 30-year bond yield increased as much as three basis points to 3.41 percent before trading at 3.39 percent.

Ten-year notes yielded 2.58 percent, after rising as much as two basis points and falling two basis points. The yield sank to 2.57 percent on May 5, matching the low on Feb. 3, which was the least since Nov. 1.

 

Yield Curve

The gap between the yields on U.S. five- and 30-year securities widened after touching 1.68 percentage points on May 2, the narrowest since 2009.

Longer-term bonds tend to rise or fall based on the outlook for inflation, while shorter maturities are anchored by the Fed’s policy rate.

The 10-year notes auctioned today yielded 2.612 percent, the lowest level since the June offering of the debt. The average forecast in a Bloomberg News survey of eight of the Fed’s 22 primary dealers was for 2.613 percent.

Investors submitted bids for 2.63 times the amount of 10- year notes for sale today, compared with 2.76 at the auction in April and an average of 2.67 at the past 10 offerings.

 

Tomorrow’s Auction

“It sets up well for tomorrow’s auction,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “The desire to own the market far outweighs the market’s willingness to sell at this time.”

Today’s auction was the second of three note-and-bond sales this week, and tomorrow’s long-bond offering is the third. The Treasury sold $29 billion of three-year notes yesterday at a yield of 0.928 percent.

Yellen told the congressional Joint Economic Committee data show “solid growth” in the second quarter, bolstering the case for a faster expansion this year. Still, she said, “many Americans who want a job are still unemployed” and inflation remains low.

The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, rose 1.1 percent in March from a year ago, a report on May 1 showed. The gauge has fallen short of the bank’s 2 percent target for almost two years.

 

Financial Stress

Yellen cited the slowdown in U.S. housing as a risk, along with “heightened geopolitical tensions” and financial stress in emerging markets. Gains in household wealth from rising home prices, less drag from federal and state and local budgets, and stronger growth abroad should all drive investment and consumption, Yellen said.

The U.S. added 288,000 jobs in April, the Labor Department said this month, the most since January 2012. The unemployment rate fell to 6.3 percent, the lowest since 2008. Separate data have shown gains in consumption, manufacturing and service industries, while gross domestic product expansion slowed to a 0.1 percent annualized rate in the first quarter after rising at a 2.6 percent pace in the previous three months.

“The Fed is going to remain in the game for now,” said Sean Simko, a money manager who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “It keeps Treasuries in the range they’re in. She has alluded to the economy making strides. We still need to remain patient.”

 

Interest Rate

The Fed said April 30 it will keep the key interest-rate target at virtually zero for a “considerable time” after its bond-buying program ends. It reduced monthly debt purchases to $45 billion, its fourth straight $10 billion cut, and said further reductions in the stimulus program are likely in “measured steps” if the economy continues to improve.

Treasury long-term notes and bonds were the world’s best- performing government securities over the past month amid tamed inflation and slowing economic growth.

U.S. government securities due in 10 years and more returned 3.5 percent in the month ended yesterday, the most of 144 debt indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

 

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