Treasury 2- to 30-Year Yield Curve Steepens to Record on Inflation Outlook

The difference in yields between 2- and 30-year Treasuries widened to a record as investors demanded higher compensation for the longer-term debt on speculation inflation will accelerate.

The gap between 2- and 30-year yields reached 4.01 percentage points, the steepest slope to the so-called yield curve since Bloomberg records on the data began in 1977. The Federal Reserve is purchasing as much as $21.5 billion in U.S. debt this week as part of its program to boost growth.

“The two-year remains anchored to the Fed’s zero interest rate policy,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “With the Fed’s own stated policy objective of spurring inflation, we would anticipate that calls for the Fed to begin its exit strategy will precede when it does, so in that context the long end will continue to underperform the two-year sector.”

Thirty-year bond yields rose five basis points, or 0.05 percentage point, to 4.57 percent at 5:01 p.m. in New York, according to BGCantor Market Data. They touched 4.61 percent, the highest level since Dec. 16. The 4.25 percent securities maturing in November 2040 fell 23/32, or $7.19 per $1,000 face amount, to 94 7/8.

The yield on the 10-year note increased four basis points to 3.37 percent, after earlier falling to 3.28 percent. The two- year note was little changed at 0.59 percent.

The spread between yields on U.S. 10-year notes and comparable TIPS, a gauge of traders’ outlook for consumer prices over the life of the securities, widened to 2.38 percent. It touched 1.47 percent in August.

Key Level

Yields earlier fell on speculation the Fed won’t be swayed by signs of an accelerating economic recovery from carrying out monetary-stimulus plans. Ten-year yields rebounded after failing to breach the 3.25 percent level, said Guy Lebas, chief fixed- income strategist and economist at Janney Montgomery Scott LLC in Philadelphia.

“The range of 3.25 to 3.50 seems to be where major money managers are planting their flags,” LeBas said. “We see selling pressure when we get closer to 3.25.”

The central bank purchased $1.7 billion of TIPS today in its quantitative easing program to acquire $600 billion in bonds through June. It will buy nominal U.S. securities tomorrow and on Jan. 20 and 21.

Policy makers have held the benchmark interest rate in a range of zero to 0.25 percent since December 2008.

Global demand for U.S. stocks, bonds and other financial assets rose in November from a month earlier as net purchases reached their highest level since August, the Treasury Department reported.

Net Buying

Net buying of long-term equities, notes and bonds totaled $85.1 billion during the month compared with net buying of $28.9 billion in October, according to data released today in Washington. Including short-term securities such as stock swaps, foreigners purchased a net $39 billion compared with net buying of $15.1 billion the previous month.

Foreign investors added $39.5 billion of Treasuries to their holdings in November, according to U.S. data. Their holdings of longer-term notes and bonds rose by $71.6 billion to $3.85 trillion, while their collective position in Treasury bills fell by $32.1 billion to $499.2 billion.

China, the largest overseas holder of U.S. government debt, increased its position in longer-term securities by $9.9 billion, or 1.1 percent, to $870.8 billion in November, the most on record. Overall Chinese holdings declined by 1.2 percent to $895.6 billion as the world’s most populous nation reduced its holdings of short-term bills almost by half to $24.8 billion from $45.9 billion.

Japan Holdings

Japan, the second-largest foreign holder of Treasuries, raised its stake in U.S. government debt by 0.3 percent to $877.2 billion.

The Treasury will announce auctions of 2-, 5- and 7-year notes on Jan. 20.

Confidence in Treasuries may plunge as the Fed continues to print money to buy bonds and as the U.S. government fails to tackle a more than $1.2 trillion budget deficit, according to Neel Kashkari, a former Treasury official who headed the taxpayer-funded $700 billion Troubled Asset Relief Program.

“Our debt is now starting to get away from us,” Newport Beach, California-based Kashkari, a managing director at Pacific Investment Management Co., said in an interview on Bloomberg Television’s “InBusiness” with Margaret Brennan.

Global stocks rose today, with the MSCI World Index reaching the highest level since September 2008. U.S. stocks fluctuated. The Standard & Poor’s 500 Index rose 0.1 percent after falling 0.2 percent.

Appeasing Investors

The highest inflation-adjusted yields in the world’s most- developed bond markets are appeasing investors waiting for President Barack Obama to begin reducing the more than $1.2 trillion U.S. budget deficit.

Treasury 10-year notes pay 1.87 percent after subtracting consumer price increases, compared with 1.41 percent for German bunds and 1.13 percent for Japanese government bonds.

Obama and Federal Reserve Chairman Ben S. Bernanke are benefiting from the slowest inflation, excluding food and energy costs, since before the 1960s as so-called real yields lure investors to finance the deficit and stimulate the economy.

“There has been grumbling about the deficit, but the market is betting that policy makers will do the right thing and focus on growth, which will help the debt picture in the long run,” Jack McIntyre, a fund manager who oversees $21 billion in debt at Brandywine Global Investment Management in Philadelphia, said.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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