Yield curve continues to narrow

January 26, 2015 10:21 AM

The extra yield on Treasury 30-year bonds compared with two-year notes fell to the least in six years as the prospect of a global economic slowdown boosted demand for the longer-dated debt.

The U.S. bond yield touched a record low 2.33% as an anti-austerity party won Sunday’s elections in Greece. Treasuries have returned 2.1% this year on a slowing global economy and plunging oil prices that have dimmed the inflation outlook, even as speculation increased the Federal Reserve will raise interest rates. The dollar climbed to an 11- year high against the euro on demand for U.S. assets as the European Central Bank plans increased bond-buying.

“The low end for 30-year Treasury yields could be 1.75%, which reflects deflationary influence,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. European developments are “enhancing the dollar’s upward trajectory, and downside pressure to inflation and long-term U.S. rates,” he said.

The U.S. 30-year yield was little changed at 2.38% at 8:25 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 3% bond due in November 2044 was 113 2/32.

Market Prices

Two-year yields rose three basis points, or 0.03 percentage points, to 0.52%.

The yield difference between two- and 30-year U.S. securities dropped to 1.86%age point, having been as low as 1.85 percentage points, the least since Dec. 31, 2008.

Greece’s securities fell, with the three-year yield rising 166 basis points to 11.73%. German 10-year yields rose two basis points to 0.38%.

U.S. government securities last week rose as the ECB pledged to inject 1.1 trillion euros ($1.2 trillion) into the euro-area economy to spur inflation.

“The longer end has really been influenced by external factors, namely the impact of sovereign QE by the ECB, continued disinflation pressure and the ongoing search for yield,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh, referring to quantitative easing. “Eventually, better domestic fundamentals will lead to upward pressure on Treasury yields.”

Fed Policy

The Fed is forecast to leave interest rates unchanged when policy makers meet this week, a Bloomberg survey of economists shows. Investors have been buying U.S. debt even as Fed Chair Janet Yellen has signaled that momentum in the labor market probably will enable the central bank to increase interest rates this year.

The chance of a Fed interest-rate increase by its October meeting was 52%, futures data show, down from 72% at the end of 2014. The central bank has kept its target for the federal funds rate at zero to 0.25% since 2008 to support an economic recovery.

The U.S. will sell $26 billion in two-year notes, $35 billion in five-year notes and $29 billion in seven-year debt on three consecutive days starting Tuesday in New York. The two- year sale was reduced by $1 billion from the prior auction, further limiting the amount of high-quality debt available.

About the Author