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Reuters
US Treasuries moribund, yield curve flattens
Thursday August 26, 9:00 am ET
NEW YORK, Aug 26 (Reuters) - U.S. Treasuries prices were moribund on Thursday as a drought of major new data left the market at the mercy of equities and oil price changes.
The benchmark 10-year note (US10YT=RR) was unchanged in price, while its yield hovered around 4.27 percent, smack in the middle of its recent trading range.
While the broader market has been range-bound, the yield curve has been on the move. The spread between two- and 10-year yields has narrowed to 174 basis points, the lowest since April 2002 and indicative of a flattening trend in the curve.
"The flatter curve is consistent with the strong rally in equities and the drop in energy prices, as rising oil prices have been interpreted by the markets as a growth constraint, taking the place of future Fed tightening," said Richard Gilhooly, fixed-income strategist at BNP Paribas.
Nymex oil (CLc1) fell below $43 a barrel in early trade having recoiled from $49 highs last week. U.S. equity futures (SPU4) were barely changed, though euro zone shares were generally firmer.
"The unwinding of the energy price spike should be a precursor to rising Fed tightening expectations, therefore causing the yield curve to bear flatten near-term," Gilhooly added.
He looked for 10-year yields to retest chart levels in the 4.40 percent to 4.45 percent area, and for two-year yields to revisit 2.75 percent.
Early Thursday, yields on the new two-year note (US2YT=RR) stood at 2.53 percent having fetched 2.494 percent in Wednesday's rather disappointing $24 billion auction.
The five-year note (US5YT=RR) eased 1/32, nudging yields up to 3.47 percent form 3.46 percent. The 30-year bond (US30YT=RR) lost 2/32, leaving yields idling around 5.05 percent.
The only early U.S. data were initial jobless claims, which rose to 343,000 from 333,000 the week before. That was a little more than expected but half the gain was linked to Hurricane Charley and discounted as transitory.
Such a level of claims would typically be associated with reasonable gains in payrolls of at least 150,000 a month. However, that relationship has broken down in recent months with payrolls coming in well below expectations.
Thus while many analysts are forecasting a payrolls rise of 150,000 in August, few are truly confident in their predictions.
Fed officials, on the other hand, have been adamantly upbeat on the economy while reiterating their intention to raise interest rates in a steady fashion.
The bond market harbors far more doubts about the economy and yields have fallen even in the face of hikes in official rates. Indeed, since the Fed first started tightening in June, 10-year yields have actually dropped 43 basis points.
Somewhat ironically, however, this fall in yields has also dragged down many types of borrowing costs, including mortgage rates, and so offered vital support to the economy.
This general easing in market rates could then make it easier for the Fed to keep raising official rates. Which is perhaps why the futures market still shows a 70 percent chance of a hike at the next policy meeting on Sept. 21.