US bond market rout bleeds into February

The US Treasuries market started February on a sour note with the 10-year yield hitting a near four-year peak on Thursday as investors booked profits on curve-related bets ahead of Friday's jobs report. US government bonds came off their worst month since November 2016. They produced nearly a 1.4 percent loss in January, according to an index compiled by Bloomberg and Barclays.
On Wednesday, the spread between longer-dated yields and short-dated ones also contracted to the tightest level in over a decade after the US Treasury Department favoured selling more short-dated debt than longer-dated issues to finance the projected rise in its budget deficit. Expectations the Federal Reserve would raise interest rates further in 2018 due to an improving economy stoked the allure of curve-flattening trades last month. The spread between five-year and 30-year Treasury yields widened to 44 basis points, a day after it touched nearly 41 basis points, a level not seen since August 2007, according to Tradeweb.
On the other hand, Mike Lorizio, head of Treasuries trading at Boston-based Manulife Asset Management, said he expects the curve-flattening move to resume once the profit-taking subsides. "Further flattening of the curve seems inevitable with the supply coming and more Fed rate hikes," he said. The Treasury said on Wednesday it planned faster growth in two-year and three-year debt issuance versus the rise in longer-dated supply.
Benchmark 10-year Treasury yields reached a fresh near four-year high at 2.786 percent. It was last at 2.784 percent, up 6 basis points on the day, Reuters data showed. The 30-year bond yield rose above the 3 percent mark to its highest level since last May. Despite the spike in longer-dated yields, analysts said a further increase will likely be limited by buying from bargain-minded investors.
"Long-end yields will still be very well-behaved," said Matt Freund, head of fixed income strategies at Calamos Investments in Chicago. On the data front, the Institute for Supply Management said its index on US manufacturing activity slipped less than expected to 59.1 in January. The Commerce Department reported construction spending grew 0.7 percent to a record high of $1.25 trillion in December.
Solid readings on manufacturing and investments led the Atlanta Federal Reserve to lift its estimate on gross domestic product for the first quarter to 5.4 percent, which would be the strongest quarter growth reading since late 2009.