The US yield curve reached it flattest level in over a decade on Monday afternoon as the White House said President Trump will nominate economist Richard Clarida as Federal Reserve Vice Chairman. The spread between five- and 30-year Treasury bonds fell to 34.6 basis points, the lowest in over 10 years. Expectations of further interest rate increases lifted the short end of the curve earlier in the day, led by the two-year government bond, which hit 2.394, its highest since September 2008.
Clarida's nomination adds another hawkish voice at the central bank, which already leans in that direction under Fed Chairman Jerome Powell. "I don't think he'll be viewed as being extreme in his views either on the hawkish or the dovish side - probably tilting on the hawkish side," said Michael Moran, chief economist at Daiwa Capital Markets America in New York.
Yield at the short end of the curve have been on the move up since the April 11 release of minutes from the US central bank's policy meeting last month showed most Fed officials were confident inflation is moving toward their desired 2-percent goal as the economy improves. The curve flattened as yields at the short end increased more than yields at the long end, where demand remained steady. There has been "significant demand at the long end for a long time now," said Thomas Simons, money market economist at Jefferies & Co in New York. The rising median age of US citizens, as reported by the US Census Bureau, has driven the steady demand for longer-dated debt, a preferred investment of insurance companies and pension funds.
That has allowed demand to be "almost unrelated to fundamental factors. Over the past couple of weeks you've had the CBO putting out the budget deficit projections - the long-term view is really quite dark," said Simons. Prices on Treasury bonds across maturities, which are a global safe-haven investment, did fall modestly on Monday as short-term demand remained muted, suggesting the market has grown less concerned about possible retaliation for the US-led air strikes in Syria on Saturday.
Yields, which move inversely to prices, rose overnight and through Monday morning, despite the weekend's turmoil in which US, British and French forces fired more than 100 missiles on Syria. The yield on the 10-year benchmark government bond was last up at 2.832 percent from its last close at 2.828 percent.