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U.S. Yield Difference Falls to Least Since 2009 on Growth Views

The gap between yields on Treasury 30-year bonds and five-year notes narrowed to the least since 2009 as uneven economic growth supported demand for longer maturities while Federal Reserve discussions of raising interest rates next year crimped the allure of shorter-term debt.

The 30-year yield reached the lowest level in a year amid reports showing business investment lagging behind projections and inflation remaining subdued. Policy makers are forecast to deepen cuts to the Fed’s monthly bond-purchase program on July 30 before an Aug. 1 report forecast to show the U.S. added 231,000 jobs. The Treasury is scheduled to auction $108 billion in notes next week.

“Economic growth is muted and we’re in a pretty low-inflation environment,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald LP, one of 22 primary dealers that trade with the Fed. “It’s positive for bonds. People anticipated much higher yields this year.”

The U.S. 10-year yield fell two basis points this week, or 0.02 percentage point, to 2.47 percent in New York, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due May 2024 rose 1/8, or $1.25 per $1,000 face amount, to 100 9/32.

Thirty-year bond yields fell five basis points to 3.24 percent and touched the lowest level since June 7, 2013.

Yield Curve

The gap between five-year notes and 30-year bonds, known as the yield curve, dropped yesterday to 156 basis points, the least since January 2009. A yield curve is a chart showing rates on bonds of different maturities.

Hedge-fund managers and other large speculators raised bets on gains in five-year notes in the week ending July 22 to the highest level in a year, according to U.S. Commodity Futures Trading Commission data. Speculative net-long positions, or bets prices will rise, reached 51,735 contracts, from 4,715 the week before.

Traders see about a 47 percent chance the Fed will have raised its target for overnight lending between banks to at least 0.5 percent by the end of June from almost zero now, based on futures contracts. The central bank is forecast to cut government bond purchases at the Federal Open Market Committee meeting on July 30, to $25 billion from $85 billion at the end of 2013.

“The Fed is still relatively dovish,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “Economic data, while better, has not been stellar.”

Inflation Level

The consumer price index increased 2.1 percent in June from a year earlier, matching the prior month, the Labor Department reported July 22.

Treasuries rose yesterday even as a report showed bookings for non-military capital goods excluding aircraft climbed 1.4 percent in June. The measure posted a 1.2 percent decrease in May that was previously reported as a 0.7 percent gain, data from the Commerce Department showed.

“Business spending is not picking up,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “It’s stuck in second gear at best.”

A report is forecast to show nonfarm payrolls rose by more than 200,000 jobs in July for the sixth straight month and the unemployment rate remained at 6.1 percent, the lowest since September 2008.

Debt Sales

The Treasury will auction $29 billion in two-year securities on July 28, $35 billion in five-year debt the following day and $29 billion in seven-years on July 30. It will also sell $15 billion in two-year floating-rate notes on July 30.

“U.S. Treasuries look pretty appetizing to a lot of investors, given the low yields in Europe,” Rogan of Guggenheim said.

The extra yield that benchmark 10-year notes offer over their Group of Seven counterparts was at 69 basis points yesterday. It rose as high as 73 basis points on July 4, the most since April 2010.

Treasuries were supported this week as Israel and Hamas considered a U.S.-backed proposal for a temporary cease-fire as the conflict in the Gaza Strip intensified. Investors assessed the conflict in Ukraine as Russia’s central bank unexpectedly increased borrowing costs for a third time this year. The threat of wider sanctions have squeezed the Russian economy and undercut the nation’s currency, the ruble.

The 10-year note yield will rise to 3 percent by the end of the year, according to the median estimate in a Bloomberg News survey of analysts.

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