Yields on long-dated maturities climb

Yields on longer-dated maturities climbed modestly higher on Thursday after two weeks of rising less than shorter-dated bonds, retracing some of the yield curve's flattening. The previous nine continuous trading days of flattening follow a trend that began in mid-February. That trade was "well into oversold territory," suggesting the move is technical and that there is still room for the curve to steepen, said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.
"We're at a period of consolidation as the market establishes new volume levels in this zone," he said, suggesting that the curve would resume flattening after the next release of significant economic data.
A flattening yield curve suggests the market believes the Federal Reserve will continue to raise rates even if there is skepticism about US growth and inflation, which has remained stubbornly low. Increased supply of government debt is also expected to tamp down Treasury prices. "The two major reasons for the flattening are the Treasury and the Fed. The Fed is going to continue on their gradual interest-rate hiking path," said Justin Lederer, Treasury analyst at Cantor Fitzgerald in New York. "When you look at Treasury issuance, they've got to fund these trillion-dollar deficits."
The US Republican government's tax bill is expected to add $1.5 trillion to the federal debt load. In addition, the Fed is winding down the amount of debt it buys, ending its crisis-era policy. Together, the tax bill and the Fed's updated balance sheet added significantly to the supply of US debt being sold in 2018.
The US Treasury Department said on Thursday it increased the amount of debt it will sell next week. On offer will be $32 billion of two-year fixed-rate debt, the most sold for this maturity in four years, and $17 billion in two-year floating-rate notes.
Not all analysts agreed on the reasons for Thursday's steepening. The overnight rise in the yield on the benchmark government note is evidence of "continued signs of positive economic growth," said Jim Barnes, director of fixed income for Bryn Mawr Trust in Devon, Pennsylvania. "I don't think you're going to see a flattening this year."
Strong economic fundamentals could be behind Thursday's 3.6 basis point increase in the spread between two- and 10-year yields and the 1.9 basis point increase in the five- and 30-year spread.
The 10-year Treasury yield was up 5 basis points from its last close, to 2.917 percent. The 30-year Treasury yield was up 6.3 basis points from its last close, at 3.109 percent.