Yield curve steepens ahead of Fed minutes

NEW YORK: The Treasury yield curve steepened on Wednesday morning ahead of the publication of minutes from the Federal Reserve's January policy meeting at which the committee expressed "patience" in raising interest rates.

Investors will scrutinize minutes from the Federal Open Market Committee (FOMC) meeting for insight into the decision to signal a pause in rate hikes after indications of an economic slowdown roiled financial markets in December.

"There will be a lot of focus on gaining better context for the severity of the dovish pause in January. And in particular that is a questions of how much weight they are putting on tightening financial conditions versus the underlying data, and whether we are at neutral," said Jon Hill, U.S. rates strategist at BMO Capital Markets.

Two-year yields, which rise in step with expectations of rate hikes, were 0.9 basis point lower at 2.491 percent. Longer dated yields rose to 2.652 percent for the 10-year and 3.004 percent for the 30-year .

The yield curve, measured as the spread between two- and 10-year yields, widened to 15.9 basis points.

Fed governors have differing opinions about whether interest rates have been raised to the neutral level this business cycle, or if they will raise rates again after the current pause.

The Fed may need to raise interest rates in 2019 but it could still end efforts to trim its massive bond portfolio before the end of the year, Cleveland Fed President Loretta Mester said on Tuesday.

However, New York Fed President John Williams told Reuters he was comfortable with the current level of U.S. interest rates and said he sees no need to raise them again unless economic growth or inflation shift unexpectedly to a higher gear.

The rise at the long end of the curve "is on the back of some large block trades in the futures market. As of now it appears more flow driven than anything fundamental," said Hill.

"You could also imagine some derisking going into the event as people are taking profit on some flattener positions or trying to get neutral. It is more flow driven and position squaring going into two o'clock than any high-conviction positions being put on."