Treasuries flatten

The US yield curve flattened on Wednesday as near-zero short-term interest rates pushed investors to buy longer-dated bonds to get a higher return. Two-year notes offered a return of 20 basis points, or 0.2 percentage point, and three-year notes offered a return of 34 basis points. Five-year notes, meanwhile, offered a return of just under 1 percent.
These less than appealing returns, at least in absolute terms, encouraged investors to buy seven-year notes, yielding nearly 1.5 percent, 10-year notes yielding 2.17 percent, and 30-year bonds yielding 3.57 percent. If US economic growth picked up enough to generate higher inflation, those yields could look low. But if the economy entered a recession and disinflation prevailed, those bets could turn out profitably.
In a recession, 10-year Treasury yields could fall to 1.5 percent and 30-year yields could fall to 2 percent, said Srinivas Thiruvadanthai, director of research and managing director at The Jerome Levy Forecasting Center. Stock market losses, though relatively restrained ones by recent standards, helped sustain demand for safe-haven US government debt.
US government debt has been largely moving inversely to equities as investors seek signs of stabilisation after wild price swings sent investors pouring into safe-haven bonds. Stocks have been supported by speculation the Federal Reserve will again intervene in the US bond market in an attempt to shore up the flagging economy, with many expecting Fed Chairman Ben Bernanke to hint at further support at his speech on August 26 at the Fed conference in Jackson Hole, Wyoming.
Gains in US price indexes are another variable to any possible Fed plans, reinforcing a division among Fed policymakers over the appropriate course for monetary policy. Last week three of those officials dissented in the Fed's decision to keep rates low for at least another two years.
Data on Wednesday that showed that US core producer prices rose at their fastest pace in six months. If that continued, it would be more difficult for the Fed to provide further stimulus. In late trade, benchmark 10-year notes were up 15/32 in price, their yields falling to 2.17 percent from 2.23 percent late on Tuesday. Seven-year notes were up 8/32, their yields easing to 1.48 percent from 1.52 percent late on Tuesday. Thirty-year bonds rose 1-28/32 in price, their yields falling to 3.57 percent from 3.67 percent on Tuesday.