(Bloomberg) — A stronger U.S. consumer and yield-hungry foreign buyers are steamrolling the Treasury market’s yield curve.
Two-year Treasuries underperformed 10-year debt for a fifth day as traders re-evaluated bets on Federal Reserve policy tightening after the strongest readings on U.S. retail sales and consumer confidence in a year. The gap between two-and 10-year yields, known as the yield curve, flattened to the narrowest since 2007 on a closing basis.
Buyers snapped up longer-term U.S. notes this week as negative yields on international government debt made Treasuries attractive in comparison. A class of institutional investors bought the biggest-ever share at an auction of 10-year notes, which sold at the lowest yield in more than three years. At the same time, short-term debt fell on speculation strong U.S. economic data will prompt the Fed to move more quickly than previously expected.
Benchmark 10-year yields fell five basis points, or 0.05 percentage point, to 1.7 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 was at 99 10/32.
Two-year yields fell about one basis point to 0.75 percent, leaving the gap between two-and 10-year yields at 95 basis points.
The trend has confounded strategists at banks such as RBS Securities Inc., one of 23 primary dealers that trade with the Fed. A team of analysts closed out a recommendation to bet on a steepening curve, which occurs when long-term yields rise more quickly than short-term yields, in a Thursday note.
Insurers generally prefer to use investments in higher-paying corporate bonds to support products with long-term obligations, such as long-term care insurance (LTCI) and long-term disability (LTD) insurance, but they hold some Treasuries, and the same factors shaping the Treasury market could make longer-duration corporate bonds less attractive.
Some insurers and reinsurers have been hoping to cope with low bond yields by buying longer-duration bonds with higher returns.
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The analysts expected a steeper curve after the Fed’s March meeting, when it lowered forecasts for 2016 rate increases, since the policy statement prompted traders to anticipate officials will let inflation quicken. That would erode the value of long-term debt most. Yet securities maturing in 10 years or longer have returned 2.4 percent since that meeting, while short-term notes have gained 0.3 percent, according to Bloomberg index data. That’s because long-term debt prices have been supported by investors searching for yield, the RBS strategists wrote.