US yield curve flattens after soft 7-year auction

NEW YORK: US Treasury yield curve moved to its flattest level in over a week on Thursday, led by a fall in longer-dated yields, despite weak demand at a $31 billion auction of seven-year government notes.

The yield curve flattened further in the wake of the Federal Reserve's signal on Wednesday that it would raise overnight borrowing costs further into 2020 even as it projected inflation may slip by that time.

"It does look like their inflation target will fall after 2020," said Brian Rehling, co-head of global fixed income strategy at Wells Fargo Investment Institute in St. Louis, Missouri.

On Wednesday, Fed officials released their latest economic projections, which showed their range of core inflation view firming to 2.1 to 2.2 percent in 2020 from the 1.9 to 2.0 percent in 2018. The range was 2.0 to 2.2 percent in 2021.

The spread between two-year and 10-year yields narrowed to 21.7 basis points, the tightest level in over a week.

Bond yields climbed modestly in the wake of data that reinforced a view of solid economic growth. They had fallen earlier Thursday on safe-haven demand tied to worries about the Italian government's struggle to reach a budget deal.

A government report showed gross domestic product grew at a 4.2 percent clip in the second quarter, the fastest in nearly four years. Another report stated durable goods rose 4.5 percent in August, rebounding from a revised 1.2 percent drop the month before.

Other government data released on Thursday signaled a wider deficit in goods trade in August and a slight pickup in jobless claims last week.

The latest spate of economic figures generally supported the outlook from the Federal Reserve, which, as expected, raised key short-term interest rates for a third time in 2018 on Wednesday.

Benchmark 10-year Treasury yield was down 0.7 basis point at 3.054 percent. On Tuesday, it reached 3.113 percent, its highest since May, Reuters data showed.

The 30-year yield slipped 0.5 basis point to 3.186 percent. It hit a four-month peak of 3.249 percent on Tuesday.

Two-year yields gained 0.8 basis point to 2.835 percent after touching 2.847 percent on Tuesday, which was last seen in June 2008.

On the supply front, the Treasury Department sold the latest seven-year Treasury issue to soft demand at a yield of 3.034 percent, which was the highest yield at an auction since April 2010.

Earlier this week, sales of two-year and five-year Treasuries fetched poor demand amid investor caution before the Fed's latest rate increase.