Treasuries outlook: yields slide, tracking Wall Street shares, German bonds

US Treasury yields edged lower on Friday, in line with weakness on Wall Street and declines in German 10-year bond yields, as the yield curve continued to flatten following strong US housing starts data for October. US two-year yields hit a fresh nine-year peak on Friday. The note has touched the nine-year milestone for the last eight sessions.
Global risk appetite took a hit earlier on Friday as US stocks tumbled, weighed down by losses in financial and technology stocks. German 10-year bond yields, on the other hand, were on pace for their largest weekly fall in three weeks. Yields briefly rose after US housing starts surged 13.7 percent to a seasonally adjusted annual rate of 1.29 million units, the highest since October 2016.
"The front end of the curve is building in the greater and greater probability of Fed rate hikes," said Tom Simons, money market economist at Jefferies in New York. "This week has been a big week for data prior to the December meeting, especially CPI (consumer price index). The CPI didn't necessarily reject the December rate hike thing, and so people are now more comfortable with that," he added.
The upbeat US housing data further flattened the yield curve. The gap between US two-year and 10-year yields contracted to 62.8 basis points, its tightest since November 2007. The difference, meanwhile, in five-year and 30-year yields narrowed to 73.4 basis points. Despite the significant yield curve tightening this year, there is further scope to go, analysts said.
"Although the direction has leveled out and possibly turned, there is room for another 20- to 25-basis point flattening as Treasury actually announces larger note auctions in the first quarter," said Jim Vogel, interest rates strategist at FTN Financial in Memphis, Tennesee.
"With a stable market outlook with respect to Fed rate increases next year - between one and two, currently - both 2-year and 3-year could increase in yield an additional 20 basis points over what would otherwise be expected," he added. In late trading, the 10-year Treasury yield fell to 2.350 percent from 2.361 percent late on Thursday.
The US two-year yield climbed to a new nine-year peak of 1.73 percent. It was last at 1.725 percent, from 1.712 percent on Thursday. US 30-year bond yields slid to 2.790 percent, down from Thursday's 2.806 percent.