Treasury Yield Curve Steepens to Highest Since 1980 Amid Sales
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By Cordell Eddings
Dec. 12 (Bloomberg) -- Treasuries declined, with the yield gap between Treasury 2-year notes and 30-year bonds reaching the widest since at least 1980 amid lower-than-forecast demand for the $74 billion in notes and bonds auctioned in the week.
Treasury 10-year notes fell for a second consecutive week as reports showed consumer confidence and retail sales rose more than forecast. Federal Reserve Chairman Ben S. Bernanke said the U.S. economy faces “significant headwinds” and economists forecast policy makers will leave rates unchanged after next week’s Federal Open Market Committee meeting.
“We had sloppy 10- and 30-year auctions at time when there are less people in the market,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The short end is locked in by the Fed and the long end is starting to see pressure from supply. Also, consumers are seeing some positive signs.”
The 10-year note yield climbed seven basis points on the week, or 0.07 percentage point, to 3.55 percent in New York, according to BGCantor Market Data. The 3.375 percent security due November 2019 fell 19/32, or $5.94 per $1,000 face amount, to 98 18/32.
Thirty-year bond yields rose 11 basis points on the week to 4/50 percent. The spread between 2- and 30-year Treasuries reached 374 basis points on Dec. 10, the most in 29 years, as the U.S. sold $13 billion of the so-called long bonds in the last of the week’s auctions.
‘Piling on out’
“The curve reflects the Fed taking short-term rates as low as it can go and the Treasury piling on out the curve,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York. Jefferies is one of 18 primary dealers required to bid at Treasury auctions. “The slope of the curve reflects the concession necessary to attract sufficient buyers to take the issue down.”
The bonds drew a yield of 4.52 percent at the auction, compared with a forecast of 4.483 percent in a Bloomberg News survey of five of the primary dealers. The $21 billion of 10- year notes sold on Dec. 9 yielded 3.448 percent, compared with a 3.421 percent average forecast.
U.S. marketable debt rose to a record $7.17 trillion in November as President Barack Obama borrows record amounts to fund spending programs.
Long-Term Target
Treasury officials on Nov. 4 announced a long-term target of six to seven years for the average maturity of Treasury debt and said the department wants to cut back on its issuance of bills and two- and three-year notes. The shift to longer- maturity debt has raised concern that investors will demand higher yields to offset the risk of inflation as government spending drives the deficit to a record $1.4 trillion.
“People are looking at what’s going on with deficits and that over time, the long end is going to be under pressure as fiscal policy has a question mark,” said Thomas Tucci, head of government bond trading at primary dealer RBC Capital Markets in New York.
Ten-year yields touched their highest levels since August yesterday as retail sales rose 1.3 percent in November, above the median forecast for an increase of 0.6 percent in a Bloomberg News survey, and the Reuters/University of Michigan preliminary index of consumer sentiment for December increased to 73.4, also higher than forecast.
‘So Far Points’
The U.S. “economic data so far points to a fairly robust recovery out of the recession,” strategists led by Mustafa Chowdhury, head of interest-rates research in New York at the securities unit of Deutsche Bank AG, wrote in a note. “The peaking of job losses could lead to a revival of consumption growth, such as inventories and government spending that have so far led this year.”
Treasury two-year notes gained for the week as Fed Chairman Ben S. Bernanke repeated in a speech Dec. 7 that the central bank expected an “extended period” of low rates.
Yields on two-year notes fell on Dec. 8 below levels seen on Dec. 3, a day before they surged the most since August after a report showed that the unemployment rate declined to 10 percent in November from a 26-year high of 10.2 percent the previous month.
‘Not Much’
“We still have a 10 percent jobless rate so what’s the Fed going to do?” said David Robin, an interest-rate strategist in New York at Newedge USA LLC, an institutional brokerage firm. “Not much. Bernanke told you that there’s a long way to go before sustainability and before there’s any comfort that what’s happening is going to give them reason to react from a rate standpoint.”
The Federal Open Market Committee will announce its rate decision at the end of a two-day meeting on Dec. 16. Fed funds futures contracts on the Chicago Board of Trade show a 100 percent change the central bank will keep its target rate near zero.
U.S. government debt lost investors 2.5 percent this year, according to Bank of America Corp.’s Merrill Lynch Treasury Master Index.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net.
Last Updated: December 12, 2009 00:01 EST
