Treasury 5-to-30-Year Yield Curve Least Since 2009 on Rates View

The difference between the yields on five-year notes and 30-year bonds narrowed to the least since 2009 on bets the Federal Reserve ends stimulus and raises interest rates sooner than forecast as the economy strengthens.

Treasury five-year notes yields pared a climb, after touching the highest since January, as President Barack Obama and Western leaders excluded Russia President Vladimir V. Putin from the Group of 8 in response to Crimea’s annexation. Treasuries fell earlier after the Fed Bank of Chicago’s national activity index topped estimates. The U.S. will sell $109 billion in fixed- and floating-rate debt this week, including $32 billion of two-year notes tomorrow.

“The curve-flattening reflects a tale of two markets -- a short end concerned about Fed tightening, and a longer end dealing with slow growth and no inflation,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The Fed told the market that the next move would be a tightening, not an easing, and the market is adjusting to this new reality.”

Yields on five-year notes rose two basis points, or 0.02 percentage point, to 1.73 percent at 5 p.m. in New York, after touching 1.77 percent, the highest since Jan. 9, according to Bloomberg Bond Trader prices. The 1.5 percent note due in February 2019 fell 3/32, or 94 cents per $1,000 face amount, to 98 29/32.

Thirty-year bond yields fell five basis points to 3.56 percent.

The U.S. 10-year yield dropped one basis points to 2.73 percent after rising to 2.82 percent on March 7, the highest level since Jan. 23.

Yield Curve

The extra yield 30-year bonds offer over five-year notes, known as the yield curve, dropped to as little as 1.83 percentage points today, the narrowest since October 2009. It has averaged 2.23 percentage points during the past five years.

Treasuries due in more than a year fell 0.5 percent this month, the biggest loss of 26 bond markets, data compiled by Bloomberg and the European Federation of Financial Analysts Societies show.

Fed Chair Janet Yellen rattled bond investors after saying on March 19 that the fed funds rate, which has been close to zero percent since 2008, may be increased about six months after the Fed stops buying bonds. Yields on all government securities surged last week, with those on two-year notes climbing eight basis points, the most since June.

‘Rate Hikes’

“We have a market that is increasingly buying in to the prospect of sooner-than-expected rate hikes,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “We’ve seen a large flattening, especially the 5s-30s curve, and that flattening represents a recalibration of the market’s expectations to the growing hawkishness of the Fed.”

The odds policy makers will increase the rate to 0.5 percent or more by January are about 19 percent, based on futures contracts. They were at 11 percent a month ago.

Policy makers cut monthly bond purchases to $55 billion last week, from $85 billion last year, and economists in a Bloomberg survey forecast the central bank will end monetary stimulus by year-end. The Fed purchased $648 million in Treasuries maturing between November 2024 and February 2031 today as part of the program.

The Treasury plans to sell $35 billion of five-year debt on March 26 and $29 billion in seven-year securities the next day. It will also auction $13 billion of two-year floating-rate notes on March 26.

The Chicago Fed’s index rose to 0.14 in February versus a forecast of 0.1 in a Bloomberg forecast. It was a revised minus 0.45 in January.

Inflation Rate

U.S. new home sales fell 4.9 percent in February, after rising in January to the highest level since July 2008, based on a Bloomberg survey before the Commerce Department report tomorrow. Durable goods orders increased 0.7 percent in February from the previous month, a separate survey showed. The Commerce Department will issue the figures on March 26.

Inflation continues to lag as the Fed withdraws stimulus.

The five-year, five-year forward break-even rate, which projects consumer-price increases from 2019 to 2024, fell to 2.39 percent last week, the lowest since June. Longer-term bonds tend to rise or fall based on the outlook for inflation, while shorter maturities are anchored by the Fed’s benchmark.

Crimea Meeting

In a joint statement after a two-hour, closed-door meeting of the four largest economies in Europe, along with Japan and Canada, the leaders of the seven nations announced that a summit meeting planned for Sochi, Russia, in June will now be held in Brussels — without Russia’s participation.

Ukraine’s acting president, Oleksander Turchinov, told the parliament in Kiev that the Defense Ministry had ordered military personnel and their families out of Crimea following threats by Russian forces, according to Reuters.

“The concern is that it will end up being more than just Crimea,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The safe-haven buying helps the Treasury market and will help the auctions.”

Foreign investors’ holdings of Treasuries have dropped.

Of the $8.1 trillion in U.S. government notes and bonds not held by the Fed, overseas investors owned $5.4 trillion as of January, data from the Treasury and the central bank compiled by Bloomberg show. The figures exclude Treasury bills, which have maturities of one year or less.

The total is equal to about 67 percent, approaching the lowest level since the government began releasing the data in 2000. Overseas investors scaled back their pace of U.S. debt purchases last year, increasing their holdings by $228.2 billion, or 4.1 percent, the least in seven years.

China, the largest foreign creditor with $1.27 trillion of Treasuries as of January, has slowed its accumulation to about 3.1 percent annually since 2010. That compares with an average yearly increase of 34 percent in the 10 years before.

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 editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Kenneth Pringle, Greg Storey

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