The difference between yields on Treasury five-year notes (CBOT:ZFU14) and 30-year bonds reached the widest in two weeks as investors questioned how quickly the Federal Reserve will raise interest rates.
The so-called yield curve steepened last week for the first time in a month as U.S. jobs gains fell short of forecasts, pushing shorter-term rates down faster than longer-term yields. A gauge of Treasury market volatility ended the week a four-month high as the U.S. economy grew more than projected and turmoil in Ukraine and the Mideast spurred demand for safety.
“Technically, the curve had extended too much on the flattening side,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The geopolitical issues in Ukraine and the Middle East add another layer of uncertainty and have kept the market from moving toward sustainably higher yields.”
The five-year note yield fell one basis point, or 0.01 percentage point, to 1.65% at 9:32 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625% security due in July 2019 rose 2/32, or 63 cents per $1,000 face amount, to 99 7/8. Thirty-year bond yields were little changed at 3.28%.
The yield curve reached 164 basis points, the highest since July 18. It flattened significantly this year, reaching 149 basis points, the least since January 2009, on July 30 as Fed discussions of boosting interest rates next year hurt the appeal of shorter-term debt while uneven economic growth supported demand for longer-term securities.
Ten-year yields (CBOT:ZNU14) were little changed at 2.49%. Ten-year rates will climb to 3.11% by Dec. 31, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.
Futures trading showed a 44% chance Fed Chair Janet Yellen will raise interest rates by June, versus 49% a month ago. The Fed has kept the benchmark rate in a range of zero to 0.25% since 2008 to support the economy.
Treasury-market volatility increased Aug. 1 after the Labor Department reported U.S. nonfarm payrolls rose by 209,000 jobs in July, versus a Bloomberg survey’s forecast for a gain of 230,000. It was the sixth straight month employers have added more than 200,000 workers. The data came a day after the government reported the U.S. economy grew 4% in the second quarter, more than forecast.
Ten-year yields dropped seven basis points on Aug. 1, the biggest decline in two weeks, leaving the rate three basis points higher for the week.
The index measuring 10-day price swings rose to 3.8 on Aug. 1, a level not seen since March 25. Volatility had waned in 2014, with the index averaging 3.1, compared with 4.6 during the previous five years.
Treasuries are at “expensive levels when considering fundamentals,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “There is potential for Treasuries to ease lower.”
“The market may depend on the stock market, where we’ve seen some risk-off move in the past days,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. Stocks and Treasuries may stabilize today, he said. “We are probably bottoming in yields, but the move higher will take some time and be gradual.”
The 10-year rate will be at 3% in six months, he said.
Investors should get out of shorts, or bets that prices will fall, according to an Aug. 1 report by New York-based JPMorgan Chase & Co., another primary dealer.
“For the next few weeks, the rate markets seem set to shift back into their low-volatility mode, leading us to turn neutral on Treasuries for the time being and to unwind tactical shorts,” Alex Roever and Kimberly L. Harano wrote in the report. “However, we continue to think longer-term Treasury yields are headed higher before year-end.”
Yields will rise as the economy grows and the Fed ends the bond purchases it has used to support the economy, according to the report.