Treasury yield curve flattens

US Treasury yields fell on Wednesday with the yield curve hitting its flattest levels in over a week as the Federal Reserve signaled it would remain a gradual rate-hike path in response to solid economic growth. Longer-dated yields led the bond market in the wake of Fed Chairman Jerome Powell's inflation comment at his press conference after the central bank's two-day policy. "His statements on the economy at the press conference was pretty bullish," said December Mullarkey, managing director of investment strategies at Sun Life Investment Management in Wellesley, Massachusetts. "On the inflation front, he saw things as pretty contained."
Powell said the central bank did not see inflation, which by various measures are now near or above its 2.0-percent goal, surprising on the upside. Before the Fed's latest rate rise and economic forecasts, some traders had bet policy-makers may hint at a faster pace of rate increases as a result of the pickup in business activity stemming from the massive tax cut enacted last December.
While the Fed officials on balance did not alter their rate-hike stance, they removed the term "accommodative" from their latest policy statement. "The Fed does not want to communicate they are 'dovish', rather, they want to unshackle themselves from the word 'accommodative' so they can freely adjust policy based on data," said Jim Caron, portfolio manager at Morgan Stanley Investment Management in New York.
Benchmark 10-year Treasury yield ended at 3.050 percent, down 5 basis points on the day. On Tuesday, it reached 3.113 percent, its highest since May, Reuters data showed. The 30-year yield was over 5 basis points lower at 3.180 percent after hitting a four-month peak of 3.249 percent on Tuesday. Two-year yields slipped more than 2 basis points to 2.819 percent after touching 2.847 percent on Tuesday, which was last seen in June 2008.
The spread between two-year and 10-year yields shrank to less than 23 basis points, the tightest level in a over week. The futures market implied traders saw a 79 percent chance of a rate increase at the Fed's December 18-19 policy meeting, down from 81 percent late on Tuesday, CME Group's FedWatch program showed.
Looking ahead, the US Treasury Department will complete on Thursday this week's sales of government debt with a $31 billion auction of seven-year notes. Earlier this week, sales of two-year and five-year Treasuries fetched poor demand on investors' caution before the Fed's latest rate move.