The yield on the two-year U.S. Treasury note breached its highest level in almost a decade on Tuesday, reflecting investors' confidence that the Federal Reserve will maintain a steady course of interest-rate increases.
The yield on the two-year note rose for a second consecutive day to 1.550%, the highest since October 2008, from 1.542% one day prior. The yield on the 10-year note settled at 2.300%, compared with 2.309% Monday. Yields rise as bond prices fall.
Investors sold short-dated U.S. government bonds and scooped up longer-term Treasurys, narrowing the gap between the yields on five-year and 30-year Treasurys to the smallest since 2007, according to The Wall Street Journal's Market Data Group.
"It's rare to see this pattern," wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a note Tuesday, adding that it reflects investors' differing expectations for short- and long-term government bonds as they anticipate a hawkish Federal Reserve and limited inflation.
Shorter-dated government bonds tend to be more sensitive to expectations for Fed policy and have been weakening in anticipation of higher interest rates in the near term and the prospect of new Fed leadership that might be more aggressive about rate increases, analysts said. Yields on longer-term bonds are more sensitive to the outlook for economic growth and inflation.
President Donald Trump plans to meet Thursday with Fed Chairwoman Janet Yellen, whose term expires in February, and has narrowed his search to five final candidates.
U.S. stocks hit records this week and some investors may be getting jittery over a potential pullback, turning to longer-dated government bonds as a hedge for their equity exposure, said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management.
Earlier, the 10-year yield had climbed as high as 2.327% after data showed that U.S. import prices ticked up 0.7% in September from a month earlier, the biggest month-over-month increase since June 2016, the Labor Department said. Economists surveyed by The Wall Street Journal expected a 0.6% increase in import prices.
The Federal Reserve looks at the import-price index to gauge how quickly overall prices for products are rising. Treasury prices tend to fall on strong inflation data because inflation is a threat to long-term government bonds, chipping away at the purchasing power of their fixed payments.
Today's data is "confirmation that the economy is doing well, and we're seeing some increase in price pressures," Mr. Ren said.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
October 17, 2017 18:12 ET (22:12 GMT)