Treasury Yield Gap Narrows as Faster Inflation Positions Undone

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The difference between Treasury five- and 30-year yields narrowed for a fourth day amid signs inflation expectations have softened.

The so-called yield curve had reached the highest level in six months earlier in May as a global bond rout raised longer-term yields. Treasury Inflation-Protected Securities show bond market consumer price expectations for the next five years have fallen to the lowest in seven weeks, while oil futures declined for a third day, pushing them more than 5 percent below their 2015 peak reached earlier this month.

“The TIPS market is in complete disarray,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. Investors with trades based on higher inflation “have absolutely no exit now that oil has reversed. This is all guys a bit offsides in bigger trades.”

The gap between five- and 30-year yields narrowed to 134 basis points, or 1.34 percentage points, the least since May 8, as of 5 p.m. New York time, according to Bloomberg Bond Trader prices. Five-year note yields rose one basis point to 1.53 percent, while 30-year bond yields dropped three basis points to 2.87 percent.

’Big Move’

“It’s been a big move narrower,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Federal Reserve. “Some of the recent move to a flatter curve has been from the slowing issuance calendar and also month-end buying,” he said, referring to fewer corporate-bond sales and demand for longer-term Treasuries to match month-end changes in bond indexes.

The U.S. sold $35 billion of five-year notes at the highest yield at auction this year. The auction drew a yield of 1.560 percent, compared with 1.563 percent in a Bloomberg News survey of eight of the primary dealers.

The U.S. sold $26 billion of two-year notes Tuesday. The securities yielded 0.648 percent. The Treasury Department will offer $29 billion of seven-year debt on Thursday.

Treasuries fell earlier while stocks rose after reports that Greek official were drafting an accord with international creditors reduced haven demand.

A Greek official said an agreement that includes changes to the pension system and a long-term solution on debt is close, even while admitting that there are still disagreements with creditors. The official asked not to be identified because the talks are private.

European officials said earlier Wednesday that Greece will likely miss a deadline for a deal by the end of the week as the two sides have made little progress in their talks.

“We’re going to trade every headline, and we’ve done that for how many years now,” Cantor’s Lederer said. “We’re going to continue to watch Greece.”

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