Yield curve flattens as investors seek safe havens

NEW YORK: The US Treasury yield curve flattened on Wednesday as the market turned cautious over rising diplomatic tension between Britain and Russia, weak US economic data and concerns over US political and trade issues.

Demand for safe-haven investments pushed long-dated securities down on Wednesday morning as data showed US retail sales fell for the third straight month and as a close congressional election in Pennsylvania and the ouster of Secretary of State Rex Tillerson refocused the market on American politics.

Compounding earlier losses, yields followed their British and German equivalents sharply lower in afternoon trade, as the Russian Foreign Ministry said it would retaliate after 23 of the country's diplomats were expelled by British Prime Minister Theresa May.

"The market doesn't like uncertainty and always struggles to price in political uncertainty. So you had this risk-off, and that's what is driving this price action," said Priya Misra, head of global rates strategy at TD Securities in New York.

Moves at the long end of the curve were far more significant than at the short end, with the spread between two- and 10-year Treasury yields down 3.2 basis points to 55.3 basis points from Tuesday's close. The spread between five- and 30-year yields was down 3.8 basis points to 44.4 basis points.

If Wednesday's move was motivated by worries about growth, "you would have had the front end reacting more. But the fact that it's the long-end reacting suggests it's much more about risk," said Misra.

The yield on the 10-year US Treasury was down 2.9 basis points at 2.819 percent, the 30-year yield down 3.9 basis points at 3.062 percent. Three-year yields were down 1.8 basis points at 2.405 percent, two-year yields were down half a basis point at 2.258 percent.

In addition to the expulsion of 23 diplomats, Britain will freeze Russian state assets in retaliation for a chemical attack on a former Russian double agent, May said on Wednesday. The Russian Foreign Ministry responded saying May's statement was a flagrant provocation and that the British government had chosen confrontation with Russia.

The yield on Britain's benchmark government bond was down 5 basis points at 1.438 percent. Its German equivalent was down 2.5 basis points to 0.594 percent.

Fears of a trade war were also renewed on Wednesday, as Trump looks to levy tariffs on up to $60 billion of Chinese imports, targeting the technology, telecom and apparel sectors, sources told Reuters on Tuesday. The Dow Jones Industrial Average fell more than 250 points, or 1 percent, on Wednesday as industrial stocks tumbled.