Shorter-dated US Treasury bonds fell but longer-dated paper rose on Monday as investors, with a lack of fresh data to look at, focused on reviving the curve-flattening trades of last week.
Expectations that short-term interest rates will rise, but that longer-term inflation expectations will be contained, have led investors to sell short shorter-dated paper and buy longer-dated notes. This has narrowed the yield curve, or the spread between yields on two-year and 10-year notes.
Last week, the spread fell to its lowest in three years at 111 basis points, before position-squaring pushed it towards 120bp. On Monday, it had dropped back to 116bp.
Hawkish comments by Jeffrey Lacker, head of the Richmond Federal Reserve, also weighed on short-dated notes. Mr Lacker said there were signs productivity growth was slowing could require faster rate rises. He added however that the Fed was likely to stay on its ‘measured’ path of tightening policy for now.
By late trade in New York, the yield on the two-year note was up 3.4 basis points at 3.046 per cent, while the yield on the ten-year was off 0.6bp at 4.197 per cent.
Eurozone government bond prices rose on Monday, depressing yields, in a reflection of the strength of the euro.
They bounced back from two-week lows on Friday that had been prompted by data indicating unexpectedly strong German business confidence.
The yield on the two-year Schatz fell 5.2 basis points to 2.365 per cent while the 10-year Bund fell 2.1bp to 3.594 per cent.
In the UK government bond market prices also rose, with the two-year gilt yield down 0.5bp to 4.429 per cent and the 10-year gilt yield 2.6bp lower at 4.465 per cent.
Japanese government bond prices were higher, as investors digested news regarding planned JGB issuance for the fiscal year beginning next April, which was within their expectations.
The yield on the 10-year note was down half a basis point at 1.39 per cent.
Total issuance of JGBs will rise to a record Y118,600bn from Y117,800bn this year, which was in line with investors' expectations.
The ministry of finance said that monthly auction amounts for 30-year, 10-year, five-year and two-year JGB auctions would remain unchanged, but said it would increase the amount of floating-rate JGBs. The returns on floating-rate JGBs are linked to the consumer price index (CPI).
