NEW YORK: The US Treasuries yield curve flattened to a six-year low on Monday after a surprisingly strong November employment report boosted expectations of an interest rate increase next year.
US employers added the largest number of workers in almost three years last month and wage gains accelerated, a sign of economic strength that could draw the Federal Reserve closer to raising rates.
Short and intermediate-date notes are the most sensitive to a rate increase and dramatically underperformed on Monday, while 30-year bonds rallied strongly.
"It's basically just follow through from Friday's number, the curve is seeing massive flattening," said Kri Bayha, a front-end Treasuries trader at Societe Generale in New York.
Two-year interest rate futures were the worst performer on the day, even underperforming two-year Treasuries, as investors preferred to sell futures to avoid any disruptions that may arise in the reverse repurchase agreement market heading into year-end, Bayha added.
Two-year notes last yielded 0.64 percent, down from three-and-a-half year highs of 0.68 percent reached in overnight trading. Three-year notes yielded 1.06 percent, down from three-month highs of 1.11 percent overnight. Five-year notes yielded 1.67 percent, down from a two-month high of 1.73 percent overnight.
The yield spread between five-year notes and 30-year bonds flattened to six-year lows of 124 basis points, down from 142 basis points last Monday.
Higher short-dated yields may help the government sell $25 billion in three-year notes on Tuesday, the first sale of $59 billion in new debt this week.
The Treasury will also sell $21 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday.
Concerns about slowing global growth also added a bid to longer-dated US debt, trumping improving momentum in the US economy.
"The market is struggling with the global growth story and the US story," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
China's exports rose at a slower-than-expected pace and imports dropped 6.7 percent in November, while Japan's economy shrank more than expected in the third quarter.
Ewald Nowotny, a member of the European Central Bank's Governing Council, said on Monday that the euro zone's economy is weakening "massively" and that he expected inflation to slow early next year.
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