The difference between yields on U.S. two-and 30-year debt narrowed to lowest level since November 2012 on speculation the Federal Reserve will raise interest rates next year while inflation remains restrained.
Treasuries rallied as investors sought to mirror month-end changes in benchmark indexes and on lower-than-projected consumption spending, tempering a report that showed the U.S. economy grew more than forecast in the third quarter. Even with the drop in yields, demand from international investors increased as German equivalent yields tumbled. The U.S. auctioned $29 billion of seven-year notes.
“The Fed is moving incrementally closer to tightening, but the long-term securities are outperforming both on the view inflation is not going to be a risk anytime soon, and relative value against our global counterparts,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of 22 primary dealers that trade with the Fed. “It’s funny to think of Treasuries as relatively high-yielding, but they are when you look at high-grade European debt.”
The gap between two-year and 30-year yields, known as the yield curve, fell to 255 basis points, or 2.55 percentage points, as of 1:02 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 252 basis points, the lowest level on a closing basis since November 2012.
The two-year note yield dropped one basis point to 0.48%, while the 30-year bond yield fell two basis points to 3.03%.
U.S. Thirty-year bonds, the longest maturity and those most sensitive to the outlook for inflation, are outperforming. They returned 3.4% this month through yesterday, while two-year notes were little changed, according to Bank of America Merrill Lynch indexes.
“Inflation is benign and is not a threat at this point,” said Sean Simko, who oversees $8 billion at SEI Investments Co., in Oaks, Pennsylvania. “The personal consumption data is a bit softer. The Fed conveyed they feel the lack of pressure is transitory. I’m not sure the market’s buying it.”
Inflation trailed the Fed’s 2% target as core personal consumption expenditures rose 1.4%, unchanged from the previous quarter.
The difference between U.S. 10-year yields and its German equivalent reached 1.45 percentage points, the highest level since Oct. 6.
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