Even as the yield difference, or spread, between Treasury two- and 30-year securities fell to the lowest since 2008, there may be space for further so-called curve flattening as the market underestimates the chances of two interest-rate increases this year, according to BlackRock Inc.
The yield gap has narrowed as traders boosted bets that the Federal Reserve will raise rates this year. A flattening of the curve may suggest investors see rates going up. Yields on two-year notes, the coupon securities most sensitive to Fed policy expectations, climbed this week to the highest in more than two months.
The odds of the Fed raising rates by July have climbed to 53 percent from about 26 percent at the start of May, according to data based on fed fund futures compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the central bank’s next increase. The probability of a move by December is 76 percent.
“We still like the flattener” in nominal bonds, Marilyn Watson, BlackRock’s global bond strategist said in a Bloomberg TV interview with Anna Edwards in London and Manus Cranny in Dubai. The bond market is “not fully priced in” for a June or July move, and “certainly isn’t pricing in two hikes this year,” she said.
“There’s still not enough risk premium priced in the front end,” Watson said. BlackRock is the world’s biggest money manager, with about $4.6 trillion in assets.
Treasury two-year note yields were little changed at 0.90 percent as of 10:36 a.m. London time, according to Bloomberg Bond Trader data. The price of the 0.875 percent securities due in May 2018 was 99 30/32. The yield rose to 0.93 percent on May 31, the highest since March 16.
Thirty-year bonds yielded 2.61 percent, leaving the spread with two-year securities at 171 basis points, or 1.71 percentage points. The gap tightened to 170 basis points earlier, the lowest since December 2008. The yield on benchmark 10-year notes was little changed at 1.84 percent.
The Labor Department’s monthly report due Friday will likely provide more clues about the state of the U.S. economy. Nonfarm payrolls increased by 160,000 in May, matching the advance in April, according to the median forecast in a Bloomberg survey of economists. Fed officials’ next policy meeting is scheduled for June 14-15.
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