Treasury Yield Curve Flattens on Williams Comments, Month-End

  • Yields mixed in late trading; short end higher, long end lower
  • Curve erases steepening triggered by corporate issuance

Treasuries were mixed in late trading Tuesday as comments by San Francisco Fed President John Williams boosted the market-implied odds of a Fed rate increase in March, lifting short-maturity yields, while longer-dated debt benefited from month-end demand.

The two-year yield was higher by 3 basis points, while the 30-year yield was lower by 1.7 basis points as of 3:40 p.m. in New York. The yield curve from five to 30 years, which steepened after Johnson & Johnson joined the corporate-issuance calendar with a deal including 30-year bonds, subsequently flattened by more than 4 basis points. Ahead of President Donald Trump’s speech to Congress at 9 p.m. ET, the administration’s failure to reach agreement with congressional Republicans on tax cuts and budget principles remained in focus.

  • Short-maturity yields reached session highs in late U.S. trading after Fed’s Williams said he expects an interest-rate increase to receive “serious consideration” when FOMC meets March 14-15
  • Monday’s trend of pricing in higher odds of a Fed hike in March continued Tuesday with selling of Dec17 eurodollars and April fed funds futures
  • 9 more Fed speakers, including Fischer and Yellen on Friday, are slated to speak before Fed’s self-imposed media blackout ahead of March 15 meeting
  • Monthly rebalancing of bond-market indexes was set to extend the duration of Bloomberg Barclays Treasury Index by an estimated 0.11yr, potentially spurring buying
  • Dimming outlook for quick congressional action on Trump’s fiscal agenda, which helped drive gains for Treasuries last week, persisted as McConnell said Trump’s budget cuts probably can’t pass Senate; timing of tax cuts and other fiscal stimulus that Trump promised has been a principal driver of yields since Election Day
  • Long-end yields declined even as IG credit issuance slate totaled $23.5b including $4.5b J&J deal
  • Mixed U.S. economic data supported USTs in early trading; while 4Q GDP est. was unchanged at 1.9% vs median est. for a revision to 2.1%, personal-consumption component underwent bigger-than-forecast upward revision to 3%; separately, January trade deficit, a drag on 1Q growth, widened more than forecast to $69.2b
  • Data slate also included bigger-than-forecast increases in Chicago PMI and Richmond Fed Manufacturing, both for February

— With assistance by Edward Bolingbroke

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