Yield curve flattens before auctions

NEW YORK: The US Treasury yield curve flattened to its lowest level in more than two weeks on Monday before the Treasury Department is due to sell $108 billion in new short- and intermediate-dated debt this week.

The debt sales will include $38 billion in two-year notes on Tuesday, $39 billion in five-year notes on Wednesday and $31 billion in seven-year notes on Thursday.

Two-year yields rose to their highest levels in a decade on Monday as investors prepared for the auctions, and on expectations that the Federal Reserve will continue raising rates.

At higher yields, the debt should be attractive, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

Wall Street dealers have been absorbing increases in Treasury supply in recent auctions as foreigners reduce purchases.

Lyngen noted there has also been solid demand from bank portfolio managers and mutual funds.

"We've seen domestic purchasers step up," Lyngen said. "I think overall the actions will be reasonably well received as long as we have some type of typical concession."

The yield curve between two-year notes and 10-year notes  was 27 basis points, the flattest since Oct. 3.

Benchmark 10-year yields had risen overnight as risk sentiment improved, with promises of tax cuts and coordinated official statements boosting Chinese stocks while relief over Moody's decision to keep Italy's sovereign rating outlook stable helped European equities snap a three-day losing streak.

That was countered, however, by concerns about Britain's exit from the European Union as fears grew that the prickly Irish border issue and disagreements within Britain's ruling party over Brexit would see Prime Minister Theresa May face a serious challenge to her leadership.

This week's economic focus is Friday's first reading of gross domestic product for the third quarter.