Rate hikes, soft data flatten yield curve to decade low

The Treasury yield curve on Friday was the flattest it had been since July 2007 as shorter-dated yields rose on expectations the Federal Reserve would hike US interest rates in spite of weaker-than-expected economic data this week. The spread between the five-year and 30-year bond yields reached a session low of 26.2 basis points, its narrowest since before the financial crisis in 2007. The spread between two- and 10-year note yields bottomed out at 41.0 basis points, the lowest since September 2007.
Yields on shorter-dated notes have been rising faster than those on longer-dated bonds. The short end of the curve, and the two-year yield in particular, reflects traders' expectations that the Fed will raise interest rates. The long end, notably the 10-year yield, indicates market sentiment about the future health of the economy and levels of inflation.
The yield on the 10-year benchmark government bond fell on Thursday as a smaller-than-expected increase in the consumer price index in April reduced fears that domestic inflation is picking up steam as the labour market tightens. "The data yesterday did not do any favours for the bearish camp, given how low core CPI was," said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York. Bond bears bet rising inflation and other economic and technical factors will prompt investors to sell Treasuries, lowering prices and lifting yields.
Yields at the long end of the curve also fell this week as the Treasury Department's auction of $73 billion in new supply of US debt was met with strong demand. The 30-year bonds sold at a yield of 3.130 percent, the highest for that maturity at an auction since March 2017, Treasury data showed. The yield at auction for the $25 billion in 10-year notes was 2.995 percent, the highest since January 2014.
The 10-year yield on Friday rose to a session high of 2.995 percent, still below the 3 percent level it broke above on Wednesday. The two-year yield hit a weekly high of 2.543 percent on both Thursday and Friday. Trader expectations that the Fed will raise rates in June is 100 percent, according to CME Group's FedWatch Tool. For a rate hike in September, the current probability is 73.6 percent, while the market remains divided over whether the Fed will make a fourth rate hike at the December meeting.