BOND REPORT: Yield Curve Flattening Maintains Relentless Momentum

The Pan-German Business Climate Index hit 117.5, a record high since unification

Treasury prices fell on Friday, pushing yields higher, as U.S. bond markets took their cue from European bonds after strong economic data out of Germany gave further evidence that eurozone growth was gathering pace.

That didn't stop long-dated Treasury yields from booking a weekly drop, even as short-dated yields rose, after dovish minutes and Federal Reserve Chairwoman Janet Yellen's remarks cut the outlook for several rate hikes in 2018.

Financial markets had an early close at 2 p.m. Eastern on Friday (http://www.marketwatch.com/story/black-friday-which-markets-are-closing-early-2017-11-24). Stock and bond markets were closed Thursday for the Thanksgiving Day holiday.

What are Treasury yields doing?

The 2-year note yield was up a basis point to 1.740%, helping to book a weekly gain of also a single basis point. This marks the maturity's fifthly weekly rise.

The 10-year benchmark Treasury note yield added 2.4 basis points to 2.343%, but nonetheless fell a basis point for the week.

The 30-year bond yield rose 2.3 basis points to 2.763%, contributing to a weekly drop of 2.7 basis points.

The spread between the 2-year yield and the 30-year yield, one gauge of the curve's steepness, narrowed to 0.60 percentage point, the tightest span in a decade.

Bond prices move in the opposite direction as yields.

What's driving the market?

The yield curve flattened this week after the Fed minutes suggested that the December rate increase was a near-certainty, even as senior central bankers held concerns about lackluster inflation. The yield curve refers to the line drawing out a bond's yield and its respective maturities, with a flatter slope signifying weaker growth outlook.

The minutes from the Oct. 31-Nov. 1 meeting of the Federal Reserve Open Market Committee suggested a December rate increase remained on track, dragging short-dated yields higher. But the same minutes revealed several Fed officials were worried what they initially saw as a string of tepid inflation readings could prove a more permanent state of affairs.

See: Fed doubts on inflation grow, but rate hike likely soon, minutes show (http://www.marketwatch.com/story/fed-doubts-on-inflation-grow-but-rate-hike-likely-soon-minutes-show-2017-11-22)

Those concerns came to the fore after outgoing Federal Reserve Chairwoman Janet Yellen late Tuesday expressed concerns about stubbornly below-target inflation. If inflation remains subdued, the impetus to raise and continue normalizing interest rates may not be apparent, she said.

What did market participants say?

"FOMC Minutes indicated that a December hike is almost certain, but longer-dated bond yields didn't rise, hearing enough concern about possible asset-price corrections and the softness of inflation expectations, to flatten the curve," said Kit Juckes, global fixed income strategist at Société Générale.

What else is on investors' radar?

The Pan-German Business Climate Index climbed to 117.5, a record high since the unification of East and West Germany in 1990. This followed a composite measure of the eurozone purchasing manager's index that surpassed economists' expectations.

See: Eurozone business 'booming' as PMIs jump (http://www.marketwatch.com/story/eurozone-business-booming-as-pmis-jump-2017-11-23)

As the eurozone goes from strength to strength, analysts have raised the probability of the European Central Bank ending its bond purchases next September. ECB President Mario Draghi has insisted, however, that its bond-buying remained open-ended. Whether September marks the effective end-date for the ECB's quantitative easing matters to U.S. investors as the ECB has said rate hikes will only follow once its asset purchases have ended.

European rates tend to move in tandem with U.S. Treasury yields as investors will take advantage of growing differences in cross-country interest rates, keeping any widening yield gaps in check.

How are other assets doing?

The German 10-year yield is up a basis point to 0.359%, while the French 10-year government bond yield was up a basis point to 0.702%. Analysts blamed the lull in trading conditions over the Thanksgiving period for the lack of a stronger selloff in the wake of the eurozone's strong economic data.

(END) Dow Jones Newswires

November 24, 2017 14:21 ET (19:21 GMT)