U.S Long Bonds Outperform on Inflation Concerns

The U.S. Treasury yield curve held near 10-year lows on Wednesday as investors evaluated the impact of hawkish Federal Reserve policy on the economy at the same time inflation measures are deteriorating.

Fed Members Speak

New York Fed President William Dudley and Boston Fed President Eric Rosengren both took the view this week that keeping interest rates low may pose risks to the economy.

“I think the market may be pricing in a little higher odds of another rate hike before the end of the year, and that is helping drive some of the flattening,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

Five-year note yields, which are highly sensitive to rate policy, rose to a four-week high of 1.80 percent on Tuesday. They last traded at 1.78 percent.

Thirty-year bond yields, which are largely driven by future expectations of growth and inflation, meanwhile dropped to 2.72 percent on Wednesday, the lowest since Nov. 9.

The yield curve between five-year notes and 30-year bonds flattened to 96 basis points, the narrowest since December 2007.

With no major economic data due this week investors were focused on Fed speakers.

Federal Reserve Board Governor Jerome Powell will speak on Thursday and Friday. St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester are also due to speak on Friday.

Bank of England (BoE)

Hawkish comments from the Bank of England’s chief economist Andy Haldane were also seen as hurting short-term bonds on Wednesday. Haldane said he would likely vote for a rate hike later this year, striking a more hawkish tone than BoE Governor Mark Carney and adding to signs of a split at the central bank.

Reuters

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