Long-dated debt yields fell on Wednesday, and the yield curve flattened to its lowest levels in a week, after the US Treasury Department said it was still considering an ultra long bond, but did not announce a new issue. The Treasury gave no timing for when it may make a decision on an ultra-long bond. It also said it has begun to consider how it will increase debt issuance to make up for a future decline in Federal Reserve bond purchases.
"They seem to be pushing off the really hard decisions that they are going to have to make to November," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York. Thirty-year Treasury bonds gained 2/32 in price to yield 2.85 percent, down from 2.88 percent before the announcement.
The yield curve between five-year notes and 30-year bonds flattened to 103 basis points, the lowest level since July 26. Concerns about bumping up against the debt ceiling may have delayed the Treasury from increasing debt issuance this quarter. "In that context it makes sense to not increase sizes when you think you may have to delay auctions or cut sizes to avoid running over the limit," Kohli said.
The Congressional Budget Office has said US lawmakers need to raise the debt ceiling by mid-October to avoid defaulting on debt payments. The Treasury said on Monday that borrowing is likely to swell to $501 billion in the fourth quarter.
Meanwhile the neutral US interest rate, a theoretical rate that is adjusted for inflation and would neither stimulate nor restrict an economy, fell to two-year lows in the second quarter, potentially making further interest rate hikes less likely in the near term. "The Fed just became neutral, which is not really where they wanted to be," said Lou Brien, a market strategist at DRW Trading in Chicago.
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