Treasury Yield Curve Twists to Follow Yellen’s Rate-Rise Plans

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The Treasury market is repositioning to reflect Janet Yellen’s plans to raise interest rates this year.

The difference between yields on two- and 30-year government debt narrowed, driven by a decline in concern that turmoil abroad would delay the Federal Reserve’s first interest-rate increase since 2006. Short-term yields, which are more sensitive to central-bank policy, rose. Longer-term yields fell, reflecting the view that higher rates would keep inflation in check.

“She made it clear the Fed does want to raise rates at some point this year,” said Donald Ellenberger, who oversees about $10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh. “That’s something that would support lower long-term yields” by helping contain inflation, he said.

The gap between two- and 30-year bonds, known as the yield curve, narrowed to 2.45 percentage points, the least since July 9, as of 5 p.m. in New York, according to Bloomberg Bond Trader prices. It has retreated from its six-month high on a closing basis of 2.56 percentage points from July 3, when Greece’s debt crisis sparked concern before the country’s referendum on a bailout package.

Greek Deal

That gap has narrowed for a second day as euro-area finance ministers authorized a 7-billion-euro ($7.6 billion) bridge loan to Greece, and European Central Bank President Mario Draghi pledged further bank funding.

“People are not so focused on battening down the hatches, so now they’re looking at ways to express their views” on markets “without getting so linked to the Fed outlook,” said George Goncalves, New York-based head of interest-rate strategy at Nomura Holdings Inc.

Yellen said Wednesday in testimony to Congress that central-bank officials may raise rates this year if economic growth matches up with their projections. Two-year note yields rose three basis points to 0.66 percent as an interest-rate rise would dent returns in short-term government securities.

“She was not as dovish as expected,” even as she reiterated that interest rates would rise at a slow pace, said Shyam Rajan, head of U.S. interest-rates strategy at Bank of America Corp. in New York.

Longer-term government bond prices were supported by a rise in the dollar against the euro and a two-day decline in crude oil prices. Both of those factors weigh down inflation and preserve the value of long-term government debt.

The difference between yields on 10-year inflation-indexed securities and nominal equivalents, known as the break-even rate, was 1.85 percent, down from 1.94 percent on June 23.

“With Greece out of the way, the market is returning to trading on other themes, and those are the decline in oil prices and a stronger dollar,” Rajan said.

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