Moderate retracement in yields after two weeks of flattening

NEW YORK: Yields on longer-dated maturities climbed modestly higher on Thursday after two weeks of rising less than shorter-dated bonds, retracing some of the yield curve's flattening.

The previous nine continuous trading days of flattening follow a trend that began in mid-February. That trade was "well into oversold territory," suggesting the move is technical and that there is still room for the curve to steepen, said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

"We're at a period of consolidation as the market establishes new volume levels in this zone," he said.

There is little significant data being released this week, but if the steepening move is technical, it would likely reverse once the market receives more fundamental inputs. Those include next week's Treasury auctions and the advance estimate of first-quarter gross domestic product on April 27.

Not all analysts agreed. The overnight rise in the yield on the benchmark government note is evidence of "continued signs of positive economic growth," said Jim Barnes, director of fixed income for Bryn Mawr Trust in Devon, Pennsylvania.

Strong economic fundamentals could be behind Thursday's 3.8 basis point increase in the spread between two- and 10-year yields and the 2.5 basis point increase in the five- and 30-year spread.

The 10-year Treasury yield was up 4.7 basis points from its last close, to 2.914 percent.

"I don't think you're going to see a flattening this year," said Barnes. "Economic growth prospects look good and I think we'll continue to maintain that same positive but somewhat slow economic growth profile."

Americans boosted their spending in March, unemployment is low at 4.1 percent and wages inched higher, according to the Labor Department's payrolls report released earlier this month. But inflation has nevertheless remained stubbornly low.

That helps explain why the 10- and 30-year yields, which are proxies for the market's view on the health of the economy and future levels of inflation, have been rising more slowly than two-year yields, which are sensitive to investors' expectation of interest-rate hikes. A flattening yield curve suggests the market believes the Fed will continue to raise rates even if there is skepticism about US growth and inflation.

"I think (the spread between five- and 30-year yields) will invert by the end of the year, but not by the end of the month," said Lyngen.

He conceded, however, that all could change in a moment.  "We're always one tweet away from a flight to quality."