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US Treasuries mixed as curve flattening unwinds
Fri Feb 11, 2005 09:24 AM ET
By Chris Reese
NEW YORK, Feb 11 (Reuters) - U.S. Treasury prices were mixed on Friday, with shorter-dated debt up and longer-dated debt easing as investors mulled whether the Federal Reserve may be contemplating the end of its interest rate tightening cycle.
Short-term yields have been rising and long-term yields falling in recent weeks as the Fed showed no sign of pausing in its measured rate hikes. But traders saw hints of some cracks in the Fed's resolve this week when Fed Bank of Atlanta President Jack Guynn said the bank might need to change the language in its policy statement, perhaps dropping references to "measured" and "accommodative".
Investor speculation that Fed Chairman Alan Greenspan may be more dovish next week in comments to Congress also may have helped spur traders to unwind recent curve flattening positions, traders said.
"With Greenspan next week, if there is any sniff that maybe they are coming close to the end of their tightening, then maybe these flattening trades are not going to pay off as much as they have already, and that is why people are being a little more cautious about the flattening trades," said Kevin Logan, economist at Dresdner Kleinwort Wasserstein in New York.
"If they unwind those flattening trades the front end does a little better and the back end does a little worse."
Indeed the recent curve flattening was unwinding somewhat on Friday, with the 10-year note (US10YT=RR: Quote, Profile, Research) down 5/32 in price to yield 4.09 percent, while the two-year note (US2YT=RR: Quote, Profile, Research) was up 1/32 in price to yield 3.27 percent, widening the spread between the two-year and the 10-year notes by five basis points to 82 basis points.
"Yesterday we saw a lot of unwinding of flattening trades, and that is the main story that is going on right now," Logan said, adding "people are still a little bit cautious about the longer end."
This caution was evidenced this week in the government's $51 billion quarterly refunding, which had good indirect bidder interest in the two-year and three-year notes, but relatively limp indirect bidder interest in an auction of 10-year notes.
"In the early auctions they were able to get out of their short front positions and then you just didn't see the demand in the longer end," Logan said.
"We are working our way back to the middle of the range," said Lundy Wright, head of Treasuries and agency trading at Nomura Securities.
The 30-year bond (US30YT=RR: Quote, Profile, Research) , whose yield has plunged 50 basis points since the start of the year, was trading 12/32 lower with a yield of 4.50 percent, while the 5-year note (US5YT=RR: Quote, Profile, Research) was yielding 3.65 percent.
Little in the way of market-moving data was scheduled on Friday, although investors will hear from a couple of Federal Reserve speakers.
Fed Governor Ben Bernanke will talk Friday afternoon on "Inflation Control in Latin America," while Fed Bank of San Francisco President Janet Yellen will participate in an Economic Outlook discussion.
Greenspan next week will testify on the U.S. central bank's semiannual report on monetary policy before the Senate Banking Committee and then the House Committee on Financial Services.
