Yield curve flattens on worries about Italy

NEW YORK: The US Treasury yield curve flattened on Wednesday morning, as longer-dated yields fell on overnight safe-haven buying, driven by reports that Italy may ask the European Central Bank for aid.

The curve flattened on Wednesday after Italian government bond yields fell with analysts citing a La Stampa article saying Italy may try to secure help from the European Central Bank. This prompted investors to buy long-term U.S. Treasuries, a safe-haven investment.

The newspaper said the Italian government was worried by what might happen in September when it unveils public spending targets. The budget, expected to contain welfare spending measures and tax cuts, will be approved sent to the European Commission by Oct 31.

The yield curve, the difference between longer and shorter dated Treasuries, had steepened on Monday and Tuesday. Benchmark 10- and 30-year bond yields  rose as investors sold longer-dated Treasuries, reducing safe-haven positions on news the United States and Mexico had agreed to overhaul the North Atlantic Free Trade Agreement (NAFTA).

Bilateral talks between Canada and the United States begin Wednesday.

Before the encouraging trade news, the spread between the two- and 10-year yield had flattened on Monday to its narrowest level in 11 years.

On Wednesday morning, the yield on the U.S. benchmark 10-year Treasury note was down less than half a basis point from Tuesday's close, last at 2.882. The 30-year bond yield was down less than half a basis point, last at 3.031 percent.

The two-year note yield was up nearly a basis point, last at 2.673 percent. The spread between two- and 10-year yields was down less than a basis point to 20.9 basis points.

"We're right back to the flattening trend. You could see a little bit of back and forth, but I think in the medium- to long-term we'll continue to flatten to zero then invert," said Justin Lederer, treasury analyst at Cantor Fitzgerald.

The curve inverts if the yields of longer-dated government debt decline below yields of shorter-dated debt. An inverted yield curve is seen as a possible signal of an economic recession.

The market is also focused on the $31 billion auction of seven-year notes at 1 p.m. EDT (1700 GMT), a $1 billion increase from July. "The seven-year auction should be okay. If you see a little bit of a concession, a little bit of tail, it will be a caused by the additional size. But the last few seven-year auctions have been well subscribed and I don't think there should be any issues," said Lederer.