Fischer Flagging Gradual Fed Increases Flattens Treasuries Curve

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The Treasury yield curve flattened for a fourth day as investors awaited data this week that may signal if the U.S. economy is strong enough to handle higher interest rates.

The difference in yield between two- and 10-year notes was set for its smallest closing level in more than two weeks after Federal Reserve Vice Chairman Stanley Fischer said central bankers are weighing the risk of raising rates prematurely. The Treasury market was closed on Monday in New York for the Memorial Day holiday.

“The data we’ve received in recent months has been quite mixed,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin. “The market has a tendency to go short at various stages in expectation of a Fed rate hike and it’s had to unwind as data has not quite managed to keep up.” A short position is a bet the price of an asset will fall.

Ten-year yields fell three basis points, or 0.03 percentage point, to 2.19 percent as of 7:07 a.m. New York time, according to Bloomberg Bond Trader prices. The benchmark 2.125 percent security due in May 2025 rose 8/32, or $2.50 per $1,000 face amount, to 99 14/32.

The U.S. will auction $26 billion of two-year securities on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year debt on May 28.

Note Auction

The rate on two-year notes rose less than one basis point to 0.63 percent. The securities on offer on Tuesday yielded 0.65 percent in pre-auction trading. The Treasury Department last sold two-year debt on April 27 at a yield of 0.54 percent, the lowest since January.

“Which is better, early and gradual or late and steep?” Fischer said Monday in a speech in Herzliya, Israel. “If we raise the rate from zero it will be harder to go back to zero if there is a problem. Our processes are not date-determined, they are data-determined.”

Fed Bank of Cleveland President Loretta Mester said on Monday the “time is near” for the benchmark rate to be raised. Policy makers will go into their June meeting with an “open mind,” she said. Central-bank Chair Janet Yellen said on May 22 that rates should rise this year if the U.S. economy continues to improve.

Fed Timing

“Investors are still in the process of assessing the timing of the rate hike depending on the economic data for the current quarter,” said Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo. “Shorter-dated maturities like two and five years aren’t pricing in a rate hike yet.”

Data on durable goods orders, new home sales and consumer confidence may help determine the direction of Treasuries Tuesday, Kadota said. Reports last week showed housing starts reached a seven-year high in April and core inflation exceeded economists’ forecasts.

April durable-goods orders fell 0.5 percent, following a 4.7 percent increase in March, according to the median estimate of economists in a Bloomberg survey before data on Tuesday.

“The main point of interest is undoubtedly U.S. durable goods,” Michael Every, head of financial markets research at Rabobank International in Hong Kong, wrote in a research note on Tuesday. “Today will help inform the U.S. data versus date debate.”

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