US yield curve flattens more on Powell's upbeat view

NEW YORK: The spread between short- and longer-dated US Treasury yields shrank further on Wednesday after Federal Reserve Chairman Jerome Powell's optimistic outlook on the economy raised bets the US central bank may raise interest rates faster.

Typical month-end buying to rebalance portfolios and choppy trading on Wall Street also fed demand for longer-dated Treasuries, analysts said.

Wednesday's yield drop reduced Treasuries' losses in February following a dismal January when it recorded 1.36 percent loss, which was the steepest drop since November 2016, according to an index compiled by Barclays and Bloomberg .

Traders have piled into curve-flattening positions as the Fed has ratcheted up key short-term borrowing costs even as inflation has remained below policy-makers' 2-percent goal.

The yield curve hit its flattest level in a decade in January, raising concerns over whether the yield would eventually invert when short-term yields run above longer-dated ones.

A curve inversion has often preceded previous US recessions.

Many analysts and traders, however, do not expect the curve to invert this year.

"Probably at the end of the Fed's tightening cycle, we may see the curve invert, but it won't be the end of this year," said Larry Milstein, head of agency and government trading at R.W. Pressprich & Co. in New York.

Powell also downplayed concerns about a curve inversion. "I don't look at the current yield curve situation as a problem," he said during the question-and-answer portion of his testimony before the House Financial Services Committee.

NEW FED CHIEF

The curve has been flattening since Tuesday when Powell said during his Q&A that the economy has strengthened since December and he was confident inflation will rise.

His comments strengthened bets the Fed might raise short-term rates four times in 2018, one more than what policy-makers projected in December.

Powell will appear before the Senate Banking Committee on Thursday to complete his first semi-annual testimony before Congress as Fed chief.

The spread between five-year and 30-year yields was 48.05 basis points, tighter than 49.85 basis points late on Tuesday, Tradeweb data showed.

The two-year Treasury yield, which is sensitive to traders' view on Fed policy, hit 2.286 percent, the highest since September 2008. It was last 2.262 percent, down a tad from Tuesday.

Longer-dated yields slipped on expectations that a faster pace of Fed rate increases would cool US inflation and economic growth.

The benchmark 10-year Treasury yield was 2.870 percent, down nearly 4 basis points on the day.

A set of weaker data on Wednesday supported the view the US economy is not firing on all cylinders.

The government revised lower its reading on economic activity in the fourth quarter to 2.5 percent. A regional gauge on US Midwest factory activity fell more than forecast in February, while pending home sales unexpectedly declined in January.