Treasury Yield Curve Shift Takes a Breather

As oil retreats from a new 10-year high, long-term yields decline relative to short-term ones.
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The trend that emerged in the Treasury market in the previous several sessions -- long-term yields rising while short-term yields hang in -- took a breather today.

Since last Wednesday, long-term Treasuries have fallen in price so much that the 30-year bond's yield finds itself higher than the 10- and five-year note yields for the first time since January. The shift has been driven mainly by the belief that the

Fed is finished hiking interest rates.

But, the shift was so sudden and violent that bond market professionals were not surprised to see it pause for a day. Anyone who has simultaneously owned short-term Treasuries and been short long-term Treasuries over the last week was sitting on a fat profit this morning. They could reasonably have been expected to close out those positions by selling the short-term issues and buying back the long-term ones.

Which is exactly what they did. The benchmark 10-year Treasury note snapped a three-session losing streak, gaining 3/32 to 99 6/32, as its yield fell 1.3 basis points to 5.858%.

The 30-year Treasury bond, which took the brunt of the selling over the last several sessions, accordingly outperformed today. It rose 21/32 to 104 23/32, dropping its yield 4.6 basis points to 5.910%.

Meanwhile, short-maturity Treasuries were unchanged to slightly lower on the day.

At the

Chicago Board of Trade

, the December

Treasury futures contract added 7/32 to 98 3/32.

The action was "definitely counter-trend,"

Fuji Futures

Treasury market analyst Holly Liss said. "Previously" -- meaning in the weeks and months leading up to this month -- "everybody was putting on flatteners." In other words, buying long-term Treasuries and selling short-term ones based on the expectation that long yields would continue to decline relative to short ones. "In the last three or four days, they put steepeners on," selling long-term issues and selling short-term ones. "Today, those came off."

There was no clear catalyst for the move, although the rise in long-term yields relative to short-term ones has been linked to rising oil prices, and oil retreated from the 10-year high it hit yesterday.

The meaning of rising energy prices to bond investors is anything but clear. On the one hand, rising energy prices have the potential to lead to faster inflation, which the Fed might fight by hiking the

fed funds rate.

On the other hand, rising energy prices have the potential to lead to slower economic growth, which could prompt the Fed to lower the fed funds rate.

But neither development is positive for long-term bonds,

Lehman Brothers

government bond market strategist Doug Johnston observed. An interest-rate cut would stimulate the economy, making bond investors wary of holding long-term bonds, while an interest-rate hike, coming after a series of hikes, doesn't offer much hope for additional gains in long-term bond prices. "At the end of a tightening cycle, the long end is never a good place to be," he said.

Accordingly, long-term Treasuries have suffered as oil has rallied, and breathed a sigh of relief, as they did today, when oil has retreated.

Economic Indicators

In economic news,

housing starts

(

definition |

chart |

source

) rose slightly in August, in line with expectations. The pace rose to 1.531 million from 1.526 million in July. It remains well off its February peak of 1.822 million. Building-permit issuance dropped to its lowest level since December 1997, indicating that starts will probably continue to slow.

Meanwhile, the weekly retail sales reports had nothing good to say about the third week of September. The

BTM Weekly U.S. Retail Chain Store Sales Index

(

definition |

chart ) fell 0.3%, its largest drop in four weeks. The

Redbook Retail Average

(

definition |

chart ) found September sales running 1.2% ahead of August after three weeks, down from 1.3% the previous week.

Currency and Commodities

The dollar fell against the yen and gained against the euro. It lately was worth 106.96 yen, down from 107.15. The euro was worth $0.8508, down from $0.8544. For more on currencies, see

TSC's

Currencies column.

Crude oil for October delivery at the

New York Mercantile Exchange

fell to $36.51 a barrel from $36.88.

The

Bridge Commodity Research Bureau Index

fell to 228.26 from 229.00.

Gold for December delivery at the

Comex

rose to $275.50 an ounce from $274.90.