BOND REPORT: Treasury Yield Curve Flattens After Fed Pledges To Gradually Hike Rates

Private-sector employment rises 177,000 in April

The yield curve flattened on Wednesday after Federal Reserve policy makers left rates unchanged but indicated they still plan to raise interest rates two more times this year.

The curve plots yields form short- to long-dated Treasury maturities. The yield for the policy-sensitive 2-year note rose 3.4 basis points to 1.296%, reached its highest levels in five weeks. Yields move inversely to bond prices; one basis point is one hundredth of a percentage point.

The yield for the 10-year note gained a 1.3 basis point to 2.309%, while the 30-year bond, or the long bond, fell 2.6 basis points to 2.955%.

All nine members of the Federal Open Markets Committee voted to keep rates steady (http://www.marketwatch.com/story/fed-holds-interest-rates-steady-dismisses-first-quarter-slump-as-transitory-2017-05-03) as analysts had expected. The Fed in the policy statement dismissed the tepid first quarter economic data as "transitory," implying the central bank was set for a June rate hike.

"I believe the Fed is ready to hike again in June as they made a conscious effort to look past the first quarter data and the 2-year note yield is higher by 3 basis points to 1.29% to reflect this," said Peter Boockvar, chief market analyst for the Lindsey Group, in a note to clients.

The spread between the 10-year and the 30-year bond narrowed, or flattened, as much as 4.1 basis points in Wednesday's trading after the Treasury Borrowing Advisory Committee, a group of senior executives from hedge funds and money managers, recommended against issuing ultralong bonds, those with a maturity beyond 30 years.

Issuance of ultralong bonds can weigh on prices for 30-year Treasurys, and lift yields, as it would eat into the demand of the bond which has the longest maturity among U.S. government paper. Treasury Secretary Steven Mnuchin had trumpeted them as a potential way to fund the White House's proposed $1 trillion infrastructure bill.

See:Wall Street cool to Mnuchin's idea of ultralong bonds (http://www.marketwatch.com/story/wall-street-cool-to-mnuchins-idea-of-ultralong-bonds-2017-05-03)

More important, analysts said the Treasury Department might have taken the advice of investors to heart as the refunding announcement showed it had not substantially hiked issuance of longer-dated bonds.

"The refunding release did not include an increase in 30-year issuance. Were the Treasury Department committed to an ultralong bond, they would start to increase issuance with longer-term bonds. But we saw that wasn't the case," said Guy LeBas, head of fixed-income strategy for Janney Montgomery Scott.

On the data front, payroll services provider ADP said private-sector employers added 177,000 jobs (http://www.marketwatch.com/story/private-sector-hiring-slows-to-177000-in-april-adp-says-2017-05-03)in April, down from 255,00 in March and the slowest pace in six months. Investors watch the ADP data for a clue to official nonfarm payrolls data, which includes government hiring, though the relationship between the ADP data and official figures has faded. Economists polled by MarketWatch expect the official jobs report on Friday to show the U.S. economy added 200,000 jobs in April after a gain of 98,000 in March.

Nonmanufacturing data from the Institute of Supply Management rose to 57.5 in April from 55.2 in March. Any reading above 50 is a sign that businesses in the services sector are growing. Treasury yields gained across the curve after the data release.

See: (http://www.marketwatch.com/story/a-big-part-of-the-us-economy-brightened-in-april-ism-services-gauge-finds-2017-05-03)A big part of the U.S. economy brightened in April, ISM services gauge finds (http://www.marketwatch.com/story/a-big-part-of-the-us-economy-brightened-in-april-ism-services-gauge-finds-2017-05-03)

(END) Dow Jones Newswires

May 03, 2017 17:44 ET (21:44 GMT)