March 25, 2020 / 9:31 PM / 14 days ago

TREASURIES-Yield curve steepens as market digests Fed stimulus

(New throughout)

By Kate Duguid

NEW YORK, March 25 (Reuters) - The spread between short- and long-dated Treasury yields rose on Wednesday, a sign of positive investor sentiment, as the broad ramifications of the Federal Reserve’s unprecedented bond-buying plans announced earlier this week soaked in.

Yields on the benchmark 10-year Treasury yield rose with stock prices as some investor demand for risky assets returned. The spread between the three-month and 10-year Treasury yields rose by roughly 10 basis points to 90.5 basis points.

The move was also attributable to the fall in the yield of the three-month Treasury bill to below zero on Wednesday for the first time since 2015, to an all-time low.

A steepening yield curve reflects investors’ belief that rates on longer-term bonds will be higher in the future, indicating continued economic expansion, causing investors to allocate funds to assets with shorter-dated maturities.

Skyrocketing demand for the short-term debt sent the three-month yield to minus 0.056%, and the one-month yield fell to minus 0.048%.

Short-term yields, which move in step with the federal funds rate, have fallen dramatically since the Federal Reserve cut its key interest rate to zero earlier this month to combat the economic effects of the coronavirus.

“Short tenor bills trading at slightly negative yields isn’t surprising given the extraordinary inflows we’ve seen into government money funds. Repo rates are also down into the single digits,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.

“This will self-correct somewhat when Treasury massively increases issuance to fund the fiscal stimulus package; we expect them to lean very heavily on the bill market to reach their funding needs,” he said.

At the long end of the yield curve, rates rose as investors took comfort in the scope of the Fed’s effort to stabilize markets by purchasing assets, and on hopes that the U.S. Senate will pass a $2 trillion stimulus package. The Fed on Monday said it will expand its asset purchases by as much as needed to stabilize financial markets.

The benchmark 10-year yield was up 5.4 basis points at 0.874%, the 30-year yield was 8.1 basis points higher at 1.458%, and the two-year yield was 4.2 basis points lower at 0.334%.

“The market is finally coming around to digesting the fact that the QE program will actually be unlimited,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “You’re starting to see a little bit of a reversal in the sell-off we saw last week.”

Also on Wednesday, the U.S. Treasury sold $41 billion of new five-year notes to a mixed reception. The bid-to-cover ratio, a metric of overall demand, was 2.53 versus an average of 2.42. But indirect bidders, a proxy for foreign demand, only took 52% of the pool, versus an average of 62%. (Reporting by Kate Duguid Editing by Richard Chang and Leslie Adler)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below