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Treasury Yield Curve Steepens Most in 8 Months on Fed

The Treasury market’s yield curve steepened this week by the most in almost eight months after Federal Reserve Chair Janet Yellen eased investor concern that policy makers would accelerate interest-rate increases.

Five-year notes, more susceptible to changes in Fed rate policy expectations, outperformed 30-year bonds after Yellen told Congress yesterday rates are unlikely to rise unless the recovery is stronger. U.S. job openings fell in March, a report today showed. Demand for Treasuries at this week’s note and bond auctions fell to the weakest level in seven months on bets a rally may have gone too far, too fast.

“It’s the front end coming down,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. Yellen “moved the needle for when rates rise to the back half of 2015. She confirmed her dovish bias. Look for a narrow trading range in the longer end of the curve.”

The yield on the five-year note was little changed at 1.63 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It fell three basis points, or 0.03 percentage point, on the week. The price of the 1.625 percent security due in April 2019 was 99 31/32.

The 30-year bond yield increased one basis point to 3.46 percent, rising 10 basis points on the week. It dropped to 3.35 percent on May 5, the lowest since June 19. Ten-year note yields were little changed at 2.62 percent, a four basis-point advance on the week.

The gap between yields on five- and 30-year Treasuries widened 13 basis points on the week to 1.83 percentage points. It was the first increase in four weeks and the biggest since the five days ended Sept. 20.

Treasury Gains

The Bloomberg U.S. Treasury Bond Index gained 0.6 percent in April and 2.68 percent this year, after losing 3.4 percent last year. It rose 0.3 percent this month through yesterday.

The $69 billion of three-, 10- and 30-year debt sold by the Treasury this week attracted the lowest demand for the monthly series of auctions of the maturities since October. The ratio of bids to debt sold was 2.83 times, compared with 2.99 times in April.

Hedge-fund managers and other large speculators increased their net-long position in 30-year bond futures to the most since Feb. 28 in the week ending May 6, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 35,677 contracts on the Chicago Board of Trade. They rose by 3,468 contracts, or 11 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Net Shorts

Hedge-fund managers trimmed their net-short position in two-year note futures, the report showed. Bets that prices will fall outnumbered long positions by 14,349 contracts on the Chicago Board of Trade.

Yellen said in testimony to lawmakers this week the world’s biggest economy still requires a strong dose of stimulus five years after the recession ended because unemployment and inflation are short of the Fed’s goals. She said that while data show “solid growth” in the second quarter, “many Americans who want a job are still unemployed.”

Policy makers have kept their target for the overnight lending rate between banks in a range of zero to 0.25 percent since December 2008.

Rate Bets

Futures prices put the likelihood the Fed will start raising borrowing costs by its June 2015 policy meeting at 46 percent, based on trading on the CME Group Inc.’s exchange. The probability of a boost by the October meeting is 90 percent.

“Treasuries are supported as people buy into the idea that interest rates are not going to rise anytime soon,” said Salman Ahmed, a global strategist at Lombard Odier Asset Management in London. “Over the next few months, data should show us whether Yellen’s dovish comments are misplaced.”

The Fed is unwinding the bond-buying program it has used to support the economy. It has reduced monthly purchases by $10 billion at each of the past four meetings, from $85 billion last year. The central bank bought $1.8 billion today of Treasuries due from October 2020 to March 2021.

U.S. economic data “is not uniformly strong, and the focus has shifted to the fact that, despite the recovery, there is no sign of inflationary pressure,” Ahmed said.

The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, rose 1.1 percent in March from a year ago, a report on May 1 showed. The gauge has fallen short of the bank’s 2 percent target for almost two years.

Jobs, Sales

The number of jobs waiting to be filled fell by 111,000 to 4.01 million in March from a revised 4.13 million the prior month that approached November’s reading as the most since early 2008, the Labor Department reported today in Washington.

Retail-sales growth cooled to 0.4 percent in April from a revised 1.2 percent the previous month, economists surveyed by Bloomberg forecast before a Commerce Department report due May 13. The consumer price index rose 2 percent in April from a year earlier, the Labor Department is projected to report May 15. Other data have shown gains in consumption, manufacturing and service industries.

Short-term notes outperformed this week. Treasuries maturing in one-to-five years returned 0.1 percent this week through yesterday, based on Bloomberg World Bond Indexes. Securities due in 10 years and longer dropped 0.8 percent, the indexes show.

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