Treasury Yield Curve Flattens as Draghi Downplays Altering QE

  • ECB unlikely to stop bond-buying program without tapering
  • Gauge of Treasuries volatility drops to lowest in two years

The Treasury yield curve flattened, with 30-year bonds outperforming shorter-dated debt, after Mario Draghi signaled the European Central Bank won’t stop its bond-buying program without tapering it first.

The gap between five- and 30-year debt narrowed to the flattest in a week as the ECB left interest rates unchanged and prolonged its asset purchases at 80 billion euros ($88 billion) a month in its policy-setting meeting Thursday, as predicted by economists in a Bloomberg survey. In a press conference, Draghi said an abrupt ending to bond purchases is unlikely. German 30-year government bonds advanced.

"It’s dovish -- they are not going to end it in March abruptly,” said Priya Misra, head of global interest-rate strategy in New York at TD Securities (USA) LLC, one of 23 primary dealers that trade with the Federal Reserve. “Treasuries are following global rates, particularly the long end."

The ECB’s effort to chart a steady course comes as gauge of swings in Treasuries touched the lowest in two years, with investors refraining from setting new positions before next month’s U.S. presidential election and amid expectations that the Fed will raise interest rates this year. The probability of a hike by December has climbed to about 68 percent, futures indicate, from 64 percent on Wednesday and 59 percent at the end of September.

Volatility Gauge

U.S. 10-year yields rose one basis point, or 0.01 percentage point, to 1.76 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 fell to 97 22/32.

The gap between yields on five- and 30-year notes, a gauge of the yield curve, flattened to about 1.25 percentage points. Shorter-dated debt is more sensitive to expectations regarding Fed interest-rate policy.

Three-month implied volatility on U.S. 10-year interest-rate swaps, a measure of projected yield fluctuations, reached 67.3, the lowest since September 2014, according to data compiled by Bloomberg.

Draghi said the ECB Governing Council didn’t discuss prolonging or tapering in this policy meeting, while noting that the publication of fresh economic forecasts in December, as well as the results of internal studies on options to avoid running into bond shortages, will help the decision then.

"There are reasons for ECB to remain accommodative, and we are looking toward the December meeting for further clarity," said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, a primary dealer.

A gauge of demand declined at Thursday’s $5 billion sale of 30-year Treasury Inflation-Protected Securities, which drew a yield of 0.666 percent.

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