Yield Curve May Steepen on Two-Year Demand: Technical Analysis

The extra yield Treasury investors demand to hold 10-year notes over 2-year debt is poised to increase because of refuge demand for the shorter maturity, according to CRT Capital Group.

“Twos continue to set record low yields on flight-to-quality demand,” said Ian Lyngen, an analyst at CRT in Stamford, Connecticut, in an interview. He expects yields on 10-and 30-year securities will rise because of next week’s auctions.

The difference between 10- and 2-year note yields was little changed at 238 basis points, or 2.38 percentage points, at 3:03 p.m. in New York. The spread was 227.5 basis points on July 1, indicating the flattest yield curve since October.

A break of resistance at 241 basis points will indicate a widening to 245 basis points, David Ader, the lead government bond strategist at CRT in Stamford, and Lyngen wrote in a research note to clients yesterday. Support is strong at the July low of 232 basis points on a closing basis, according to the analysts. A break below 229 basis points would indicate trendline support at 227 basis points, they wrote.

“Momentum remains supportive of a steeper curve, although that is under some pressure with stochastics contained by a downward sloping trend in momentum,” the strategists wrote. Stochastics measure the price in relation to the range during a selected period.

The U.S. government will sell $74 billion in its quarterly sales of 3-and 10-year notes and 30-year bonds on three consecutive days beginning Aug. 10. That day the Fed may consider providing added stimulus after reports indicated the economic recovery is stalling.

Outlook on Fed

“We are less concerned about taking down the three-year auction and more worried about a bearish read on the Fed, assuming they don’t announce a dramatic second round of quantitative easing,” Lyngen said in the interview.

The two-year note yield increased to 0.56 percent today after dropping yesterday to the all-time low of 0.51 percent. The yield on the 10-year note advanced to 2.94 percent after slipping to 2.88 percent, the lowest level since July 22.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

Support is an area on charts where buy orders may be clustered, making further price decreases more difficult. Resistance is an area on a chart where sell orders may be clustered. A breach often implies an extension of a move.

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