Prices on longer-dated US Treasuries extended their rebound, with significant bull-flattening, as investors digested a rate increase by the Federal Reserve and became more skeptical of the central bank's ability to raise rates as much as it would like in 2016.
Investors expected short-term interest rates to increase at a faster rate than long-term rates in a bear-flattening move, but the yield curve has been flattening because of demand for longer-dated Treasuries and less because of selling of shorter-dated ones. "It (bull flattening) suggests that investors continue to see the relative safety of Treasuries and may not be fully believing the Fed's more optimistic growth and inflation expectations," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.
Bull-flattening refers to an environment in which long-term rates have been decreasing faster than short-term rates. Yields on longer-dated issues fell during morning trading after data showed that the number of Americans filing for unemployment benefits last week fell from a five-month high, suggesting labour market healing that could lead to further interest rate hikes next year. These yields continued to fall faster than on short-dated issues. The yield on the 30-year bond was last down 0.072 basis points while the yield on the 2-year note was down 0.012 of a point.
Shorter-dated yields rose sharply after Fed Chair Janet Yellen made clear that the move was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next increase the Fed would put a premium on monitoring inflation, which remains mired below target. Traders had been increasing their curve-flattening positions in anticipation of a 2015 rate hike, which involved reducing holdings of short-dated Treasuries and increasing stakes in longer ones.
The Philadelphia Fed Business Conditions Index fell to negative 5.9 in December, indicating a struggling manufacturing sector in the US Mid-Atlantic region. "There's enough weakness domestically and globally that disappointing data matters and may impact inflation reaching the Fed's 2 percent goal," said Dan Heckman, senior fixed income strategist at US Bank Wealth Management in Kansas City, Missouri.
Two-year notes were last up 1/32 in price to yield 0.992 percent, down from 1.005 late on Wednesday. US benchmark 10-year Treasury notes were last up 17/32 in price to yield 2.230 percent, down from 2.289 percent late on Wednesday. The US 30-year bond was last up 1-13/32 in price to yield 2.993, down from 3.00 late on Wednesday.