Long-dated Treasury debt prices advance

US long-dated Treasury debt prices rallied on Monday, boosted by the drop in oil prices which suggests inflation in the world's largest economy would remain benign. US 30-year bond yields fell below 3.0 percent, while 10-year yields slid to the day's low of 2.204 percent. The yields on shorter-term maturities slipped as well, but not as much as the drop seen on those of the longer tenor. The move has further flattened the US Treasury yield curve, a phenomenon that involved selling the front-end of the curve and buying the long end.
Traders tend to sell the short end since it is most vulnerable to a Federal Reserve interest rate hike, while they buy the longer-dated debt, which tends to benefit from lower inflation once the Fed raises rates. "The likely Federal Reserve tightening and the drop in stocks and commodities are narrowing and flattening the yield curve considerably," said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco. "That's giving the long end its outperformance." Crude oil futures tumbled to their lowest in nearly seven years on Monday after Opec failed to address a growing supply glut. In late trading, US benchmark 10-year Treasury notes were up 13/32 to yield 2.227 percent, down from Friday's 2.273 percent.
The 30-year bond rose more than a point to yield 2.953 percent, down from 3.007 percent on Friday. US 2-year Treasury notes, meanwhile, were little changed in price, with a yield of 0.934 percent, down from 0.951 percent on Friday. On Thursday, two-year yields hit 0.994 percent, their highest since May 2010.
"You've got the Fed more than likely to hike next week so front-end yields cannot go much lower," said Action's Rupert. US Treasuries have also seen a major selloff in the run-up to last Friday's robust US jobs report. Investors have also sold Treasuries in anticipation of a Fed rate increase next week and therefore Monday's rally was inevitable as investors consolidated positions. This week's $58 billion in supply, however, could limit the fall in yields. In the pipeline are $24 billion in 3-year notes on Tuesday, $21 billion in reopened 10-year notes on Wednesday, and $13 billion in 30-year bonds on Thursday. The government also sold $54 billion in 3- and 6-month bills on Monday, fetching high interest rates, compared with previous auctions. On Tuesday, the government will sell $14 billion in 52-week bills.