Yield curve flattens as demand depresses long end

NEW YORK: The US yield curve flattened on Tuesday as longer-dated bonds fell on strong demand for 30-year securities at auction, and on earlier news that February consumer price data cooled, suggesting the anticipated pickup in inflation is likely to be gradual.

The spread between the five-year note and the 30-year bond fell to its lowest level since Feb. 2. The strength of the 30-year reopening in spite of the $1 billion increase in supply suggests firm demand for long-dated bonds, and spurred additional bond buying in the open market.

Though the five-year note's yield initially fell on news earlier on Tuesday that US inflation had slowed in February in line with expectations, it soon retraced those losses as the market digested the data.

"The strength of the 30-year auction despite a persistent rally speaks to the depth of demand for the long bond and reinforces our own conviction that the fives/30s curve will continue to flatten," said Aaron Kohli, interest rate strategist at BMO Capital Markets in New York.

Large investment funds, bond dealers and other direct bidders snapped up $13 billion of US 30-year Treasury bond supply on Tuesday. Direct bidders took 14.75 percent of the supply, their largest share at a 30-year bond auction since October 2015.

The high yield reached during the auction was 3.109 percent, below the expected 3.115 percent, another indicator of strong demand from investors.

"I think that without a significant threat that 10s will leap toward the 2.90s this week; 30s have started to look a bit cheaper. There's less downside price risk in longer Treasuries," said Jim Vogel, interest rate strategist at FTN Financial in Chicago, Illinois.

The Labor Department reported that its Consumer Price Index rose 0.2 percent last month, in line with expectations, but had slowed compared with its 0.5 percent jump in January. January's surge in inflation cemented investors' expectation of an interest rate hike in March and increased the possibility of a fourth hike in 2018.

Although February's data was in line with expectations, it reduced the possibility of a fourth rate hike this year, with Fed funds futures data showing investor expectations fell from 28 percent before the release to 25 percent following it.

The 30-year bond yield was last trading at 3.099 percent, down 3 basis points from Monday's close. The yield on the benchmark 10-year Treasury note was 2.844 percent, down from 2.870 percent at last close. The five-year note, was down 1 basis point to 2.625 percent.