U.S. yield curve flattens on bets of Fed buying

By Richard Leong

NEW YORK (BestGrowthStock) – The U.S. yield curve moved on Tuesday to its flattest since early September as weaker consumer confidence data raised bets that the Federal Reserve will roll out more stimulus to aid a faltering economy.

Strong bidding at a $35 billion auction of five-year U.S. government debt also fueled the market rally, sending long-dated yields to their lowest in more than three weeks.

The Treasuries market has rallied in the past week after the Fed signaled that it was open to a second round of quantitative easing, essentially another expansion of its balance sheet by buying more government bonds.

The Fed’s accumulation of more Treasuries is intended to stimulate spending and investments, which have been lacking due to high unemployment and economic worries, analysts said.

“I think the Fed is coming in. The September policy statement opened the door. Now they just have to walk through it,” said Lou Brien, market strategist with DRW Trading in Chicago.

This bond-bullish outlook has been augmented by speculation that the Bank of Japan would deploy the $20 billion to $22 billion it bought during its currency intervention this month into Treasuries.

This week’s auction data has supported this view of the second-biggest holder of Treasuries amassing more U.S. debt.

Monday’s two-year notes and Tuesday’s five-year debt from indirect bidders which include foreign central banks have came in above-average.

Moreover, Fed data showed overseas central banks raised their holdings of Treasuries by $35.8 billion last week.

“This is what they seem to be doing with those dollars,” Brien said of the Japanese central bank.

The Treasury Department sold the latest five-year government note issue due September 2015 at a record low yield of 1.260 percent.

As the market rallied for a second day, the gap between two- and 10-year Treasury yields shrank to 202 basis points from 210 late on Monday.

Growing expectations of the Fed’s “QE2” have narrowed the 2/10-year yield spread from its recent wide of 227 basis points about 1-1/2 weeks ago.

(Additional reporting by Emily Flitter)

U.S. yield curve flattens on bets of Fed buying