Treasury yield curve flattest in 10 years

The gap between US short-dated and long-dated US Treasury yields contracted to its tightest in a decade after data showed a pickup in US underlying inflation and an unexpected rise in retail sales, as the market priced in further interest rate hikes next year. The flattening of the yield curve reflects expectations that the Federal Reserve will continue to raise rates, pushing yields on the short end higher. At the same time, US inflation, although trending higher, will likely remain subdued, limiting yields on longer-dated bonds.
"The details of both reports for October's retail sales and consumer (CPI) inflation were resilient enough to maintain the FOMC along the short-end interest rate tightening path," said John Herrmann, rates strategist at MUFG Securities Americas in New York. The gap between US two-year note and US 10-year note yields contracted to 63.4 basis points, the smallest since November 2007.
The difference in five-year and 30-year yields narrowed to just under 75 basis points, the flattest in nearly two weeks. US consumer prices edged up in October, and rising rents and healthcare costs pointed to a gradual buildup in underlying inflation. "The Fed was already on track to press ahead with another rate hike in December, not least because the unemployment rate
has already fallen well below their end-year forecast," said Michael Pearce, US economist at Capital Economics in New York. "With signs that underlying inflation pressures are starting to pick back up again, we think the Fed will need to step up the pace of tightening next year, raising the Fed funds rate a total of four times in 2018," he added.
Another report showed US retail sales unexpectedly rose 0.2 percent in October, with the data for September revised to show sales jumping 1.9 percent rather than the previously reported 1.6 percent advance. In afternoon trading, the 10-year Treasury yield fell to 2.336 percent, from 2.381 percent late on Tuesday.
The US two-year yield was at 1.687 percent, from 1.691 percent on Tuesday. US 30-year bond yields slid to 2.784 percent, down from Tuesday's 2.839 percent.