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Tags: U.S. Treasuries | yield curve | Federal Reserve | interest rates

US Treasury Yield Curve Steepens as Note Yields Dive

CME Group traders react to an announcement by the Federal Reserve
Traders signal offers in the S&P 500 stock index futures pit at the CME Group following an announcement by the Federal Reserve on interest rates. (Getty Images)

Thursday, 16 December 2021 04:12 PM

The U.S. Treasury curve steepened as note yields tumbled on Thursday, a day after the Federal Reserve doubled the pace of its monthly bond-buying tapering and flagged three interest rate increases next year.

Bucks Flattening -- At Least for Now

As the Fed moves toward a rate hiking cycle, the curve typically flattens as expectations of an interest rate increase tend to push short-term yields higher more than those on the long end.

"Curve steepening is definitely a surprising reaction. The Fed definitely checked all the hawkish boxes yesterday," said Zachary Griffiths, macro strategist at Wells Fargo. "We are definitely in the flattening camp going forward. But this seems to be a brief pause," he added.

The gap between the five-year and 30-year yields widened to as much as 70 basis points, the steepest since Nov. 30. The curve was last at 69.10 basis points. The closely watched spread between two-year and 10-year note yields was slightly steeper at 80.40 basis points.

The steepening came amid hawkish actions from not only the Fed, but some global central banks as well, with the Bank of England and Norway's Norges Bank raising interest rates and the European Central Bank turning a little less dovish.

... Omicron Could Be the Reason

Gennadiy Goldberg, an interest rate strategist at TD Securities in New York, pointed to fears over COVID-19's Omicron variant for the drop in note yields, which move inversely to prices. "That helps explain the bull steepener and the pricing out of some rate hikes because the market is penciling out some 2022 and 2023 rate hikes during this move," he said, adding liquidity issues may be exacerbating the move and that investor repositioning after the Fed meeting may also be a factor.

The benchmark 10-year yield was last down 2.8 basis points at 1.4344%, while the two-year yield, which reflects short-term interest rate expectations, was last 6 basis points lower at 0.6269%. The five-year yield fell to its lowest since Dec. 6 and was last at 1.1816%. But, the 30-year bond yield was last up 2 basis points at 1.8729%.

Goldberg said given Treasury bond yields have already rallied to low levels, it was hard for them to fall more, adding that they were reflecting "a very low terminal rate," which is the level where the Fed stops raising rates. Thursday's U.S. data, meanwhile, was mixed, with initial unemployment claims showing a moderate increase in the latest week, while housing starts rose.

The reports had fairly minimal impact on Treasury yields. The U.S. Treasury announced auctions next week for $20 billion of 20-year bonds and $17 billion of five-year Treasury Inflation-Protected Securities. The amount of cash flowing into the Fed's overnight reverse repurchase facility hit a record high of $1.657 trillion on Thursday, topping Wednesday's record $1.621 trillion. 

© 2022 Thomson/Reuters. All rights reserved.


StreetTalk
The U.S. Treasury curve steepened as note yields tumbled on Thursday, a day after the Federal Reserve doubled the pace of its monthly bond-buying tapering and flagged three interest rate increases next year.
U.S. Treasuries, yield curve, Federal Reserve, interest rates
466
2021-12-16
Thursday, 16 December 2021 04:12 PM
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