The margin between short- and long-dated US Treasury yields shrank on Wednesday as quarter-end buying for portfolio rebalancing and safe-haven demand due to growing stock market losses pushed the benchmark 10-year yield to seven-week lows. On the other hand, weak demand at a $29 billion auction of seven-year notes, the final leg of this week's record high $294 billion in government debt supply, propelled shorter maturity yields higher.
"It wasn't a great auction," said James Ong, senior macro strategist at Invesco in Atlanta. "But I wouldn't read too much into one auction." All the other Treasuries auctions this week were met with average demand, according to analysts. The $14.6 trillion bond sector, which investors now favor over stocks, has produced a 0.68 percent total return in March for its strongest month since last August, according to an index compiled by Bloomberg and Barclays.
"We are seeing a strong bid this week, reflecting a flight-to-quality demand," said Bill Merz, head of fixed income research at US Bank Wealth Management in Minneapolis. "It's been exacerbated by short-covering." This week traders have exited short positions or bets on bond yields to rise as US stock prices fell on worries about a trade war between the United States and China and a scandal over political consultants accessing Facebook user data.
Speculators had heavy net short positions in Treasury futures with near record net shorts in five-year T-notes, according to data from the Commodity Futures Trading Commission released last Friday. The yield on 10-year Treasury notes was down 1.5 basis points at 2.773 percent. It hit a seven-week low of 2.743 percent earlier. Two-year Treasury yields were up 0.4 basis point at 2.282 percent. The spread between two-year and 30-year yields contracted to 72 basis points, its tightest level since September 2007, Tradeweb and Reuters data showed.
The US bond market will close early at 2 pm (1800 GMT) on Thursday and shut for the Good Friday holiday.