Treasury yield curve touches narrowest since 2007 as investors pare growth expectations


The 2-year Treasury yield rose while those for the 10-year slipped, resulting in the tightest spread between the pair since 2007, as investors trimmed long-term growth expectations even as they expected the Federal Reserve to stick to two to three additional rate increases for the remainder of 2018.

What are Treasurys doing?

The benchmark 10-year Treasury note yield

TMUBMUSD10Y, +0.03%

fell 2 basis points to 2.814%, while the 30-year bond yield

TMUBMUSD30Y, -0.24%

slipped 3.3 basis points to 2.998%, its third straight decline. The 2-year note yield

TMUBMUSD02Y, +0.53%

rose 0.8 basis points to 2.386%, the highest yield since Aug. 2008.

The spread between the two-year note yield and the 10-year note yield, a widely-watched measure of the yield curve, narrowed to 42.8 basis points, the tightest since September 2007. A flattening yield curve is often a feature of a rising rate environment and can spur worries about an economic slowdown.

Bond prices move in the opposite direction of yields.

What’s driving markets?

The yield curve, which normally slopes upward, has extended its tightening trend as lackluster economic data have pushed down long-dated yields even as senior Fed officials’ backing for a gradual-but-sustained hiking trajectory have lifted long-dated yields. The Citi Economic Surprise Index, a gauge of how much recent economic data have shot above or fallen below expectations, slipped to 21.80 in April 16 from a high of 84.70.

The yield curve may also be narrowing over concerns that a boost to fiscal policy through tax cuts and an increase to spending caps may foreshorten the U.S.’s second-longest economic expansion. The International Monetary Fund said that impact from the tax cuts would be short-lived.

Like Monday, traders have had plenty of speeches from senior Fed officials to glean further clues on its policy path. The question lingering on investors’ minds is how many rate increases the central bank intends to implement until the end of the tightening cycle, and if it was willing to raise rates above it its so-called neutral rate. The neutral rate is a level that puts neither upward or downward pressure on inflation, at is at around 2.9%, according to the most recent chart, or dot plot, of Fed members’ outlook for interest rates.

Philadelphia Fed President Patrick Harker said the current unemployment rate was below the neutral rate, leading to a potential buildup in higher wages. Chicago Fed President Charles Evans said gradual rate increases were appropriate and that the risk of the economy overheating wasn’t very high. San Francisco Fed President John Williams, said the yield-curve inversion was a powerful recession indicator but didn’t see signs of it happening soon, and said he backed a gradual rate increase path.

Opinion: This proven recession predictor is close to sounding an alarm

What did market participant say?

“Neither March retail sales or CPI suggest US consumption is responding quickly to tax cuts while the Fed concentrates on the potential risks of fiscal stimulus. Both views can be correct, so many strategists recommend positioning for further flattening,” said Jim Vogel, interest rate analyst for FTN Financial.

What else was on investors’ radar?

Housing starts for March came in at 1.319 million, well above the annual pace of 1.255 million forecast by economists surveyed by MarketWatch. Industrial production for March rose 0.5%, above the economists’ forecast of a 0.4% gain.

How are other assets doing?

The 10-year German government bond yield

TMBMKDE-10Y, -3.32%

 fell 1.4 basis points to 0.509%, according to Tradeweb data. German sovereign paper is seen a proxy for the eurozone’s economy and the viability of the economic bloc.

Source : MTV