US yield curve flattens on weak auction, stock market swings

NEW YORK: The margin between short- and long-dated US Treasury yields shrank on Wednesday as quarter-end buying for portfolio rebalancing and safe-haven demand due to growing stock market losses pushed the benchmark 10-year yield to seven-week lows.

On the other hand, weak demand at a $29 billion auction of seven-year notes, the final leg of this week's record high $294 billion in government debt supply, propelled shorter maturity yields higher.

"It wasn't a great auction," said James Ong, senior macro strategist at Invesco in Atlanta. "But I wouldn't read too much into one auction."

All the other Treasuries auctions this week were met with average demand, according to analysts.

The $14.6 trillion bond sector, which investors now favor over stocks, has produced a 0.68 percent total return in March for its strongest month since last August, according to an index compiled by Bloomberg and Barclays.

"We are seeing a strong bid this week, reflecting a flight-to-quality demand," said Bill Merz, head of fixed income research at US Bank Wealth Management in Minneapolis. "It's been exacerbated by short-covering."

This week traders have exited short positions or bets on bond yields to rise as US stock prices fell on worries about a trade war between the United States and China and a scandal over political consultants accessing Facebook user data.

Speculators had heavy net short positions in Treasury futures with near record net shorts in five-year T-notes, according to data from the Commodity Futures Trading Commission released last Friday.

The yield on 10-year Treasury notes was down 1.5 basis points at 2.773 percent. It hit a seven-week low of 2.743 percent earlier.

Two-year Treasury yields were up 0.4 basis point at 2.282 percent.

The spread between two-year and 30-year yields contracted to 72 basis points, its tightest level since September 2007, Tradeweb and Reuters data showed.

Wall Street's three major indexes were down for a second day, on track for their biggest monthly loss since January 2016.

Given this week's stock market volatility, bond yields will likely test lower levels ahead of a three-day weekend, Invesco's Ong said.

The US bond market will close early at 2 p.m. (1800 GMT) on Thursday and shut for the Good Friday holiday.

On the data front, the government revised up its reading on domestic economic growth in the fourth quarter to 2.9 percent from 2.5 percent. Analysts polled by Reuters had forecast an adjustment higher to 2.7 percent.