The US Treasury yield curve flattened on Thursday as the European Central Bank committed to leaving interest rates alone into the first half of 2020, disappointing traders who had bet on a rate cut. Most yields ended the day higher in the wake of a Bloomberg report that said the United States is weighing whether to delay tariffs on Mexican imports, which are set to take effect on Monday.
The ECB also allowed banks to borrow at a rate just 10 basis points above its minus 0.4% deposit rate provided they beat the ECB's lending benchmarks in a new targeted longer-term refinancing operation, or TLTRO. The combined ECB moves were less aggressive than what some traders had expected, touching off selling in shorter-dated German government debt, which in turn spilled over into shorter Treasury maturities, traders and analysts said.
"In Europe, the selling came with some pricing in of an ECB rate cut," said Subadra Rajappa, head of US rates strategy at SG Corporate & Investment Banking in New York. Much of the yield curve flattened, coming off its steepest level in seven months the day before. The gap between two-year and 10-year yields narrowed by 4.4 basis points to 23.30 basis points.
The US curve steepening had been stoked by bets that the Federal Reserve would ease monetary policy if the US economy slows. Economic worries among investors have stemmed from trade tensions between the United States and China and other US trading partners. "The market is coming around to the idea that there may a prolonged trade war and that has implications for growth and inflation," Rajappa said.
This week, a number of Fed policymakers have suggested the US central bank is open to lower US interest rates if the economy deteriorates. Interest rate futures implied traders see up to three Fed rate cuts by year-end. In late US trading, benchmark 10-year Treasury yields were up 0.80 basis point at 2.131%, erasing an earlier 3 basis point fall as Wall Street was bolstered by the Bloomberg report on a probable delay on US tariffs on Mexico.
US yields hit session lows earlier Thursday in step with their German counterparts as investors had anticipated the ECB hinting at cutting rates deeper into negative territory. German 10-year yields tumbled to record low of -0.241% before retracing to -0.232%.