US Treasury two-year note yields touched a nine-year high on Tuesday, while those on long-dated debt fell as the yield curve flattened for a second straight day and investors braced for the next tightening by the Federal Reserve in December. A flattening of the yield curve typically suggests the Fed is on track to raise US interest rates, pushing yields on the short end higher, while low inflation is seen limiting those on longer-dated bonds.
US benchmark 10-year yields hit a nearly three-weak peak after data showed US producer prices rose a more-than- expected 0.4 percent last month, boosting the PPI 2.8 percent in the 12 months through October for the biggest annual increase in wholesale inflation in more than 5-1/2 years. Even though yields on both the two-year and the 10-year rose after the US data, the curve continued to tighten.
The yield gap between shorter-dated and longer-dated Treasuries shrank, with the spread between US two-year note yields and US 10-year note yields contracting to 69 basis points. The spread between five-year and 30-year yields also flattened to 77.20 basis points. That was the narrowest in nearly two weeks.
"The flattening in the US curve is mostly an outgrowth of Fed hikes in a low inflation environment and ... tends to be associated with lower growth and higher risks premiums in the future," said Richard Franulovich, head of FX strategy at Westpac in New York. But Atlanta Fed President Raphael Bostic on Tuesday said a flatter curve may reflect safe-haven investing and confidence in the US economy and, were the trend to lead to an inverted yield curve, it would not necessarily signal a pending recession. In late trading, the 10-year Treasury yield was at 2.378 percent, down from 2.4 percent late on Monday. Earlier, US 10-year yields hit 2.414, the highest since late October.
The US two-year yield hit a nine-year peak just shy of 1.7 percent, up from Monday's 1.687 percent. US 30-year bond yields, on the other hand, fell to 2.836 percent, from 2.869 percent on Monday.
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