NEW YORK, Nov. 30 (Reuters) – The U.S. Treasury curve steepened on Monday morning despite traders having to rebalance their portfolios this afternoon for the end of the month, an event that typically pushes yields lower than long term.
The spread between yields on two- and ten-year Treasuries, a measure of the yield curve, widened 1.5 basis points on Monday to 69.7 basis points. The spread between five-year and 30-year yields, which measures a separate section of the yield curve, was 1.3 basis points wider at 121.6.
Traders need to rebalance their portfolios at the end of the month, which can sometimes lead to market movements out of sync with news and economic data. The maturity of a bond portfolio decreases at the end of the month, with bonds approaching their maturity date. In order to rebalance, traders buy longer-term debt, which lowers yields.
“From there, our expectations for a disproportionate end-of-month offer that redefines the direction of US rates are limited; if anything, the last day of November will just serve to offset the momentum of the steepening, ”said Ian Lyngen, head of US rate strategy at BMO Capital Markets.
The development of two COVID-19 vaccines by Pfizer and Moderna has raised investors’ expectations for an economic recovery in 2021. Those hopes have pushed up yields at the long end of the Treasury curve. Since the first vaccine announcement on November 9, the benchmark 10-year yield has increased by about 3 basis points.
On Monday, bullish bets that the 10-year Treasury will rise, measured by the value of the CFTC’s net speculative long position in 10-year futures, reached their highest level since mid-October.
Some analysts have speculated that the Fed will buy more longer-term debt to prevent these yields from continuing to rise. Notes from the last Fed decision-making meeting indicate that some FOMC members have also discussed this possibility. But the steeper curve and the higher futures position indicate that the market is not convinced the move will happen anytime soon.
“I’m not on the side that thinks the Fed will change asset purchases in December,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald. He suggested the Fed could adjust its purchases if the 10-year yield rises above 1% and the 30-year rate exceeds 1.8%, but none of those levels have been reached since March.
“I wouldn’t be surprised if we work here for the rest of the year,” Lederer said. (Reporting by Kate Duguid; editing by Jonathan Oatis)