U.S. five-year note yields (CBOT:ZFZ14) touched the highest in almost a month after a higher-than-forecast reading in the Institute for Supply Management’s U.S. factory index boosted the argument for an interest-rate increase.
Yields on long-maturity debt, more sensitive to the outlook for inflation than expectations for changes in monetary policy, rose less with gains in consumer prices below the central bank’s target since April 2012. The difference in yields between two- and 30-year Treasuries, known as the yield curve, narrowed for a second day.
“Any time you get positive data like this morning you will have pressure on yields higher, with a ramping-up in rate-hike speculation, which is why the short end is underperforming and the curve is flattening,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.
The yield on Treasury five-year notes increased two basis points, or 0.02 percentage point, to 1.63% at 3:40 p.m. New York time, according to Bloomberg Bond Trader data. It jumped as much as five basis points to 1.66%, the highest level since Oct. 7. The price of the 1.5% debt due October 2019 dropped 3/32, or 94 cents per $1,000 face amount, to 99 12/32.
Two-year note yields (CBOT:ZTZ14) climbed as much as three basis points to 0.53%, also the highest level since Oct. 7, before trading at 0.51%. Thirty-year bond yields rose one basis point to 3.07% after rising to 3.10%.
The two-, 30-year yield curve flattened to as little as 2.54 percentage points as speculation the Fed will speed up its timetable for raising interest rates next year. The curve reached 2.42 percentage points on Oct. 15, the least on an intraday basis since August 2012.
The Fed has kept the benchmark rate target at virtually zero since 2008. The central bank’s preferred measure, an index tied to consumer expenditures, has stayed below policy makers’ 2% inflation target since April 2012.
“The long end has been relatively well insulated from these Fed-expectation swings we’ve had over the last couple of months,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 22 primary dealers that trade with the U.S. central bank. “If you look at Europe or Japan, you’re not getting any yield whatsoever on the long end of the curve. The U.S. is relatively attractive from that standpoint.”
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