Treasury Yield Curve Narrows as IMF Downgrades GrowthCordell Eddings and Daniel Kruger
The difference in yields between two- and 10-year Treasury notes narrowed to the least this month as investors bet on slower growth with the International Monetary Fund reducing its 2014 outlook for the U.S. economy.
U.S. government debt climbed earlier as a potential civil war in Iraq spurred demand for haven assets. The yield spread narrowed toward a one-year low with the Federal Open Market Committee on course to end its monthly bond purchases this year and markets pricing a 61 percent chance interest rates will increase by July 2015. U.S. government debt briefly erased gains after industrial production climbed more than forecast in May.
“It’s this pervasive belief that inflation isn’t likely to get out of hand over the long run, that the Fed’s actions -- such as they are -- don’t lead to an environment where a significant risk premium needs to be priced in at the long end of the curve,” said Aaron Kohli, an interest-rate strategist BNP Paribas in New York, one of 22 primary dealers that trade with the Fed.
Benchmark 10-year yields were little changed at 2.60 percent at 5 p.m. in New York after falling to 2.57 percent, according to Bloomberg Bond Trader prices. The price of the 2.5 percent note due in May 2024 was 99 5/32.
Yields on the 10-year note rose two basis points last week after an 11 basis-point jump the prior five-day period.
The yield difference between two- and 10-year notes narrowed for a third day, tightening three basis points to 213 basis points, after falling to 207 on May 28, the least since June 19, 2013. A flatter yield curve suggests investors scaled back on growth expectations.
Shorter maturities are more sensitive to what the Fed does with interest rates, while longer-dated debt is more influenced by the outlook for inflation. A yield curve is a chart showing rates on bonds of different maturities.
The Fed is reducing its monthly bond purchases, while keeping the target for overnight lending between banks in the range of zero to 0.25 percent it has been since 2008. Policy makers signaled at their April 29-30 meeting that interest rates will stay low for a “considerable time.” They meet for two days in Washington beginning tomorrow.
The central bank bought $2.698 billion of Treasuries today maturing from June 2018 to February 2019 as part of the program, which was designed to hold down borrowing costs and spur economic growth.
“We have been at zero for more than five years now, and it will continue to be longer until we start to see some change on the economic front,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said of interest rates. “The market believes another $10 billion in tapering is in the cards no matter what.”
Treasuries gained after the Washington-based IMF said it now sees the world’s largest economy growing 2 percent this year, down from an April estimate of 2.8 percent. The IMF left a 2015 prediction unchanged at 3 percent, and said it doesn’t expect the U.S. to see full employment until the end of 2017, amid low inflation.
For the Fed, the forecast means “policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets,” the fund said in its annual assessment of the U.S. economy.
“The downgrade reflects the idea that the U.S. still has a ways to go to get back on track,” said Sean Murphy, a trader in New York at the primary dealer Societe Generale SA. “With the Fed coming, we shouldn’t stray too far from these levels.”
U.S. debt briefly erased gains as output at factories, mines and utilities rose 0.6 percent after a revised 0.3 percent drop in April that was smaller than previously estimated, a report from the Fed showed in Washington. The median forecast in a Bloomberg survey called for a 0.5 percent increase.
The consumer price index increased 0.2 percent in May following the previous month’s 0.3 percent advance, which was the biggest since June 2013, according to the median forecast of economists surveyed by Bloomberg News before tomorrow’s report. Costs were up 2 percent in the past 12 months, matching the biggest advance since October 2012.
“Everyone expects the Fed will taper and they won’t adjust rates, so all eyes will be on forward guidance and their outlook for growth,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Geopolitical risk is causing some safe-haven buying that is giving support to Treasuries.”
Treasuries rose earlier as Iraq’s sectarian violence showed no sign of abating. Prime Minister Nouri al-Maliki, a Shiite, is fighting to reverse the advance of Sunni Muslim militants, who captured Iraqi’s largest northern city and other towns last week. The violence has pushed OPEC’s second-largest oil producer to the verge of civil war three years after the U.S. pulled its forces from the country.
The Bloomberg US Treasury Bond Index has returned 2.8 percent this year through June 13, compared with last year’s 3.4 percent loss. The Global Developed Sovereign Bond Index has climbed 3.9 percent since Dec. 31.