Yield curve slightly steeper as vaccine launches, ahead of Fed

NEW YORK: The Treasury yield curve steepened modestly on Monday, ahead of this week's Federal Reserve meeting, and as select hospitals were set to administer the first COVID-19 vaccines.

The first 2.9 million doses, developed by Pfizer Inc and its German partner BioNTech SE, started shipping to distribution centers around the United States on Sunday, just 11 months after the country's first documented COVID-19 infections. The vaccine rollout came as the U.S. death toll passed 300,000 lives lost.

"I would say that for the most part the sell-off in rates today is happening because vaccines are being deployed," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

Yields were also reacting to mixed expectations about what may come out of the Fed's monthly two-day policymaking meeting which begins Tuesday. Many investors believe the central bank will discuss the possibility of increasing its purchases of longer-dated Treasury debt to cap yields. But the steeper curve suggests investors believe the Fed will not yet adjust its asset purchases to cap longer-dated yields.

"We don't really see any need for the Fed to extend its average maturity of its portfolio purchases given the fact that financial conditions are extraordinarily easy. Yes, the curve has steepened, but inflation expectations have also risen meaningfully. The employment picture continues to improve," said Rajappa.

While the yield curve remained steeper on the day, the broader move seen earlier Monday faded in afternoon trade. The most commonly used measure of the yield curve - the spread between two- and 10-year yields - rose Monday to its highest in a week. It has retreated to 77.9 basis points, about 0.4 basis points higher than Friday's close.

"It almost seemed like the market moved after the headlines that New York might lock down again. So I wonder if the market is starting to get a little concerned that things might get worse before they get better even though the vaccines are starting to be distributed," said Gennadiy Goldberg, interest rates strategist at TD Securities.

The spread between five- and 30-year yields was also steeper at 127.6. The spread between the three-month bill yield and the 10-year, the Fed's preferred measure of the yield curve, was also modestly steeper at 82.2 basis points.

The benchmark 10-year yield was last at 0.898%, up 0.7 basis point from Friday's close, well within last week's trading range. The 30-year yield was up 1.2 basis points to 1.637%, also within its recent range.

The two-year yield was last at 0.117%, down 0.4 basis point from Friday.