BOND REPORT: Treasury Yield Curve Resumes Flattening Ahead Of Debt Auction

By FeaturesDow Jones Newswires

Long-dated Treasury yields fell further than their short-dated peers on Tuesday as expectations for an aggressive Federal Reserve looked set to flatten the so-called yield curve.

Trading volumes are expected to be thin in the week following Christmas as European markets, including the U.K.'s, are closed on Dec. 26 (http://www.marketwatch.com/story/when-do-financial-markets-close-for-christmas-2017-12-20).

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What are Treasurys doing?

The 10-year Treasury note yield dipped 2 basis points to 2.461%, from 2.486% on last Friday. The 2-year note yield was slightly higher at 1.899%, from 1.894%. While, the 30-year bond fell 2 basis points to 2.811%, compared with 2.833%.

Bond prices move in the opposite direction of yields.

What's driving markets?

Prospects for the U.S. central bank to raise rates three to four times next year even against a lackluster outlook for inflation have dulled demand for short-dated Treasurys, while a tepid outlook for inflation and prices has helped maintain a bid in long-term bonds. As a result, the yield curve, a line tracing a bond's maturities and its yields, has continued to flatten--typically viewed as a harbinger of bad economic prospects.

Tuesday's trade has retraced part of the steepening seen last week, which was fueled by concerns that the Republican tax bill could stimulate inflation in an economy where slack was nowhere to be seen.

See: Steepening yield curve slams one of the bond market's biggest bets (http://www.marketwatch.com/story/steepening-yield-curve-slams-one-of-the-bond-markets-biggest-bets-2017-12-20)

With few major economic reports set for this week, the highlight for traders is a coming supply of short-term paper.

An auction for the 3-month Treasury bill drew weak demand (http://www.marketwatch.com/story/3-month-treasury-auction-sees-poor-appetite-on-debt-ceiling-worries-2017-12-26)as investors avoided buying debt at risk of default if Congress fails to hike the federal government's debt ceiling.

Fresh issuance can influence appetite for bonds in the outstanding market, but auctions on Tuesday were expected to perform weakly because trading desks are lightly staffed, a day after Christmas.

What are market participants saying?

"It's just a re-flattening of the yield curve. And if you look at what people are focused on this year, longer term interest rates versus the shorter-term interest rates. The Fed is set to raise interest rates three to four times next year, that will have a bigger impact on the short-end of the curve," said Tom di Galoma, managing director for Treasurys trading at Seaport Global Securities.

What else is on investors' radar?

The S&P/Case-Shiller national index rose 0.7% for the 3-month period ending in October (http://www.marketwatch.com/story/home-prices-stay-high-up-62-from-a-year-earlier-case-shiller-shows-2017-12-26). Higher real-estate values can encourage consumers to spend more.

What assets are on the move?

Japanese government bonds struggled for direction after Japan's inflation rate rose 0.9% year-over-year (http://www.marketwatch.com/story/japanese-inflation-creeps-toward-2-target-2017-12-26) in November, accelerating from the 0.8% increase seen in October. But the improvement in inflation data remains gradual, and well below the central bank's 2% annual target.

The 10-year Japanese government-bond yield stood at 0.039%.

(END) Dow Jones Newswires

December 26, 2017 13:06 ET (18:06 GMT)