NEW YORK- Treasury yields headed lower after solid bidding in the $16-billion sale of 20-year Treasury bonds on Monday suggested the market still anticipates inflation will decelerate and that the Federal Reserve will cut interest rates around June next year.
The Treasury sold 20-year bonds at a high yield of 4.780 percent , or lower than the roughly 4.810 percent yield the market was trading at in the half hour prior to the auction.
“The 20-year auction definitely found a pretty solid bid, especially after the 30-year auction went so poorly a couple weeks ago,” said Ben Jeffery, rates strategist at BMO Capital Markets in New York, referring to the sale of 30-year bonds on Nov. 9 that analysts described as “terrible” and “ugly.”
Concerns remain regarding aggregate Treasury supply and what higher net issuance means for the level of interest rates, he said. The Treasury sold $159 billion in debt on Monday, and plans to auction another $90 billion on Tuesday.
“We’re starting to see some stronger signs of demand for duration and the bull flattening of the (yield) curve resonates with that reaction,” Jeffery said.
A bull flattener occurs when long-term interest rates fall faster than short-term rates and make the yield curve flatter, seen as a bullish signal for both the stock market and economy.
The yield on 10-year notes fell 1.5 basis points at 4.426 percent , on track for the lowest close since Sept. 20, while the two-year’s yield, which reflects interest rate expectations, rose 1 basis point to 4.917 percent .
Treasury prices have jumped after the 10-year’s yield, which moves inversely to price, hit a 16-year high of 5.021 percent in late October following Fed Chair Jerome Powell’s warning the strong US economy might warrant tighter financial conditions to curb inflation.
Data since then has shown a decelerating pace of inflation, and bond yields have tumbled as Treasuries rallied.
Earlier on Monday, the Conference Board’s Leading Economic Index for October fell 0.8 percent , or one-tenth of a percentage point more than a Reuters poll of economists expected. The think tank expects the US economy to fall into a very short recession.
“The index continues to fall at a roughly 8 percent year-on-year rate, the breadth and the depth of the decline suggests that a hard landing is still coming,” said Joe LaVorgna, chief US economist at SMBC Nikko Securities in New York.
“We could debate about how hard it will be, but that hard landing is still coming,” he said.
The difference between yields on two- and 10-year notes seen as a recession harbinger when shorter-term notes are higher than longer duration bonds, or what’s known as the curve being inverted, was at -49.4 basis points.
