Shorter-dated US Treasury yields fell on Wednesday as traders piled on bets the Federal Reserve would raise interest rates gradually in the coming months in the wake of dovish comments from Fed Chair Janet Yellen. This view of slow rate increases spurred a wave of curve steepening trades in which investors deem longer-dated Treasuries less profitable due to risk of higher inflation down the road.
Longer-dated bonds lagged shorter maturities with 30-year Treasuries, falling by more than 1 point during the session. The yield premium on 30-year bonds over five-year notes grew to 1.39 percent, the highest in a month. "The steepening in the curve is largely a result of the fact that Yellen sounded so immensely dovish," said Aaron Kohli, interest rates strategist at BMO Capital Markets in New York. "She talked about oil, she talked about China, she kind of (downplayed) inflation a little bit even though it looks like it's heating up."
In a speech at the Economic Club of New York on Tuesday, Yellen highlighted risks to the global economy and said the Fed should proceed "cautiously" as it looks to raise rates. Yields for both two- and three-year bonds ended near one-month lows after a solid $28 billion seven-year note auction. While shorter-dated Treasury yields posted their steepest two-day drop since September, longer-dated yields rose from their multi-week lows set on Tuesday.
Benchmark 10-year Treasury notes last traded down 3/32 in price, paring losses following the seven-year auction. The 10-year yield was last 1.825 percent, up 1 basis point on the day. "That's the next big thing on the market's radar will be the payroll number on Friday. Clearly that's been one of the strongest sectors of the economy," said Don Ellenberger, head of multi-sector strategies at Federated Investors in Pittsburgh. Economists polled by Reuters projected US employers likely filled 205,000 positions in March, fewer than the 242,000 in February. The jobs growth would leave the unemployment rate at an eight-year low of 4.9 percent.
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