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Treasury Curve Disinverts as 30-Year Exceeds Two-Year Yield

Most yields rise in response to the rally in the Nasdaq, but hope lives that the Fed will cut rates.

Treasuries scattered today, with short-maturity issues rallying while long-maturity ones fell. The rally in the stock market was a factor, as were a decent report on the state of the manufacturing sector and the weakness of the dollar against the euro, market analysts said.

The simultaneous improvement in the two-year

note's yield (to 5.612%, a new low for the year, from 5.658%) and rise in the 30-year

bond's yield caused the bond to end the day with a higher yield than the two-year note for the first time since January. Short-term yields have been dropping more than long-term ones in recent weeks as investors have become convinced that the

Fed will lower interest rates in the months ahead to keep the economy from slowing too much.

Other factors in today's price action, market-watchers said, were

J.P. Morgan's

asset-allocation shift away from bonds and a think-tank report suggesting that interest rate cuts by the Fed aren't imminent.

The benchmark 10-year

Treasury note fell 9/32 to 101 23/32, lifting its yield 4 basis points to 5.518%.

The 30-year

Treasury bond fell 16/32 to 108 22/32, lifting its yield 3.2 basis points to 5.641%.

At the

Chicago Board of Trade

, the March

Treasury futures contract fell 18/32 to 102 3/32.

The stock market continued to be the main driver of price action in the bond market. For the better part of this year, stock-market selloffs have stoked demand for Treasuries, and stock-market rallies have triggered selling of Treasuries. The theory of the trade is that the stock market is a leading indicator of economic activity. If growth accelerates, interest rates should rise, causing bond prices to fall, and if it slows, interest rates should fall, causing bond prices to rise.

"This was another day where we followed stocks," said Roseanne Briggen, market strategist at

MCM Moneywatch


"There's an amazing correlation between equities and the two-year

Treasury yield,"

Lehman Brothers

economist Drew Matus said. "My favorite chart is the two-year yield versus the Nasdaq. Nothing shows it better."


Nasdaq Stock Market

has the strongest influence on Treasury prices because it "reacts first and worst" to evidence the pace of economic growth is changing, Matus said.

But also, he said, the Nasdaq and the two-year Treasury epitomize risky and risk-free assets in a bipolar investing world. "I think it's just a matter of how people perceive their investment needs," he said. "When they decide they want a risky asset, they go all out. When they don't want risk, they come all the way back. So you end up with cycling in and out of the Nasdaq."

The economic news of the day was tricky for Treasury market participants to interpret because whether it was strong or weak depended on your perspective.


Purchasing Managers' Index


definition |

chart |


) fell to 47.7 in November, the lowest since December 1998, from 48.3 in October. Readings under 50 indicate that the manufacturing sector is contracting, and this was the fourth sub-50 reading in a row.

Economists polled by


had forecast that the index would rise slightly, to 48.5. But the polling took place before the release

yesterday of an extremely weak

Chicago Purchasing Managers' Index


definition |

chart ) for November.

The Chicago report made bond market participants hopeful that the national index would also fall sharply. When it didn't, they were disappointed. The report "seemed to indicate the economy is not slowing as drastically as was thought after the Chicago report," Lehman's Mattus said.

Still, concerns about the health of the U.S. economy relative to Europe's economy helped boost the value of the dollar against the euro, and that prompted some shifting from Treasuries to European government bonds, MCM's Briggen said.

J.P. Morgan's asset allocation shift hurt Treasuries because it came at a time when most investment strategists have been increasing their bond allocations, Matus said.

The think tank that indicated it does not expect the Fed to cut interest rates in the near future was said to be

Medley Global Advisors

. A spokeswoman confirmed the firm had issued a report on monetary policy today, but said no one was immediately available to describe its contents.

Economic Indicators

In other economic news,

construction spending


definition |

chart |


) rose 0.8% in October, significantly more than the 0.1% forecast. The pace of construction spending, which benefits from low interest rates, rose to 8.6%, the highest since May 1999, from 7.7% in September.

Currency and Commodities

The dollar rose against the yen and fell against the euro. It lately was worth 111.17 yen, up from 110.39. The euro was worth $0.8790, up from $0.8722. For more on currencies, see


Currencies column.

Crude oil for January delivery at the

New York Mercantile Exchange

fell to $32.05 a barrel from $33.82.


Bridge Commodity Research Bureau Index

fell to 228.66 from 229.79.

Gold for February delivery at the


fell to $272.00 from $273.30.