NEW YORK: The margin between US shorter-dated and longer-dated Treasury yields widened on Monday from its slimmest in a decade as traders booked profits on curve-flattening positions tied to the view the Federal Reserve would raise interest rates further.
Expectations that inflation would remain tame and the government would increase its short-term borrowing with the possible passage of the Republican-backed tax cut bill had supported traders favoring longer-dated Treasuries over shorter-dated ones.
"There is a bit of profit-taking on the recent big flattening move," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.
Last week, Fed policymakers signaled they expected the US central bank would hike rates three times in 2018, projecting a short-term jump in economic growth from the Trump administration's proposed tax cuts.
Top US Republicans said on Sunday they anticipated Congress would pass their tax overhaul this week. Independent government analyses estimated the plan would tack on at least $1 trillion to the $20 trillion in national debt.
Analysts expected the Treasury Department would raise its issuance of Treasury debt maturing out to five years to finance an increase in the federal deficit from the tax proposal.
A possible increase in Treasury supply, possibly in early 2018, spurred a rise in short- to medium-term yields early on Monday. The yield increase on those maturities cooled as profit-taking on curve flatteners emerged with a surge in stock prices on Wall Street on optimism about the passage of the tax cuts.
The three major US stock indexes reached record highs on Monday.
In late trading, the two-year Treasury yield was down 0.8 basis point at 1.832 percent after hitting a nine-year peak of 1.857 percent earlier.
The spread between five-year and 30-year yields hit 51.9 basis points, a level not seen since October 2007, before steepening to 57.5 basis points. It ended at 53.3 basis points on Friday, according to Tradeweb.
Despite Monday's curve steepening, the recent trend of curve flattening appeared intact, analysts said.
"The (steepening) move was fairly modest. Longer-term, we expect the curve to continue flattening," said Justin Hoogendoorn, head of fixed income strategy and analysis at Piper Jaffray in Chicago.
On the data front, the National Association of Home Builders said its housing market index, which is seen as a proxy on home construction, rose to 74 points in December, stronger than forecast and above a revised 69 in November.
Economists are monitoring whether the mild pickup in mortgage rates in recent weeks has begun denting housing activity. Reports on new and existing home sales will be released later this week.
Comments
Comments are closed.