Long-term Treasury bonds are taking a hit this morning, caused somewhat by uncertainty attached to the conflict in Kosovo. Haven buying took place in short-dated European issues earlier, and that pattern is holding here in the U.S. Treasury market.
Lately the 30-year Treasury bond was down 18/32 to trade at 94 14/32, causing the yield to rise to 5.64%.
While the relative safety of long-dated U.S. Treasury bonds may make this morning's selling seem mildly strange, the market was already biased toward a steeper yield curve, in part due to expectations for large paydowns in shorter-dated issues in the coming weeks. Both the increased bombing of Serbian targets by NATO as well as technical pressure has exacerbated this move.
"It's uncertainty," said Tony Crescenzi, chief fixed income strategist at
Miller Tabak Hirsch
. "At this time of year we've seen in the last two years the market do extremely well. The numerous maturing issues are concentrated more with shorter-dated issues than the bonds, which will lend a steepening bias in and of itself."
The difference in basis points between the two-year note and 30-year bond has widened to 65 basis points from 47 basis points on March 18.
Gains in two-year notes are being held back by market sentiment. The market believes the
next move will be a tightening to 5%, and so traders are reluctant to let the two-year trade far below that. Lately the two-year note was up 1/32 to yield 4.99%.
The likelihood of a rate hike or even the adoption of a tightening bias at tomorrow's
Federal Open Market Committee
meeting continues to diminish, due to uncertainty bred by the conflict in Kosovo. With the exception of a couple of economic reports, the data would support this move, if only to satisfy the hawkish members of the Fed. However, officials have sounded more dovish than usual in recent comments, effectively guiding the market.
"In light of Kosovo, they will be even less inclined to raise rates," said Crescenzi, who, until Kosovo, believed the Fed would shift to a tightening directive. "They would not want to throw a wrench in the equation, and they'll wait a little bit before intimating a hawkish leaning."