TREASURIES-Yield curve resumes flattening as rate hikes seen near
(Updates prices)
* Prices erase earlier losses, yield curve resumes
flattening
* Seven-year note auction sees lowest demand in 13 months
* Bond market closes early Wednesday, closed Thursday
By Karen Brettell
NEW YORK, Dec (Shanghai: 600875.SS - news) 24 (Reuters) - Long-dated U.S. Treasury prices
ended higher on Wednesday and the yield curve resumed flattening
as investors bet that the Federal Reserve is closer to raising
interest rates.
The Treasury yield curve is its flattest in six years and
two-year note yields are the highest in three-and-a-half years
as traders prepare for an imminent rate hike.
Money markets are also adjusting. Overnight index swaps
indicate the federal funds rate will more than double to 30
basis points in a year.
"People are gaining confidence that the economy is on very
solid ground, and the Fed is probably going to move earlier than
June, and that all rates should rise," said Charles Comiskey,
head of Treasuries trading at Bank of Nova Scotia in New York.
Bonds posted their worst day in nine months on Tuesday after
data showed the economy grew in the third quarter at its
quickest pace in 11 years. The number of
Americans filing new claims for unemployment benefits also
unexpectedly fell last week.
Short and intermediate-dated debt has been most hurt in
recent months by expectations of an interest rate hike, while
30-year bonds have been in strong demand as investors reach for
higher yields, and on concerns about deflation.
Thirty-year bonds and 10-year notes took the brunt of this
week's selloff, before recovering on Wednesday afternoon.
"Selling pressure is moving out the curve," Comiskey said.
"People are coming to grips that interest rates are going to
rise and the front-end can only go so far before an actual rate
hike."
Thin trading conditions heading into Thursday's Christmas
holiday have dented demand and exacerbated price moves this
week. Some investors also unwound flattening trades that have
been profitable this year, said traders.
The gap (NYSE: GPS - news) between five-year and 30-year Treasury yields
flattened to 106 basis points, and is down from
around 220 basis points at the beginning of the year.
The government sold $29 billion in new seven-year notes on
Wednesday to tepid demand.
The notes sold at a high yield of 2.125 percent, the highest
since September. The bid to cover ratio was the lowest since
November 2013 as direct bidders bought the lowest share of the
bonds since February 2011.
The bond market closed Wednesday at 2 p.m. (1900 GMT) and
will be closed all day on Thursday.
(Additional reporting by Richard Leong; Editing by W Simon and
Grant McCool)