Updated from 11:46 a.m. ESTGlobal bearishness weighed on Treasuries on Monday ahead of upcoming data on consumer spending and housing. But some traders said the market is oversold and that a bounce is coming that could once again invert the 10- and two-year yields. Longer-dated maturities, such as the 10-year note and the 30-year bond, typically yield more than shorter-dated notes, because it's riskier to lend money for longer periods of time. But falling prices on the short end of the curve have lately pushed rates above those on the long end, causing an "inverted" yield curve, something that has been a reasonably reliable leading indicator of economic slowdowns in the past. Bond prices and yields move in opposite directions. The benchmark 10-year ended Monday down 4/32 of a point to yield 4.77%, near the highest it has been since June 2004, and the 30-year bond fell 8/32 of a point to yield 4.76%. The two-year was unchanged to yield 4.73%, and the five-year edged lower 1/32 of a point to yield 4.77%. Bond prices fell in the eurozone ahead of economic reports due out this week that are expected to show strong investor sentiment and growth. On March 2, the European Central Bank raised borrowing costs by 25 basis points to 2.5%, and is expected to further tighten the money supply. Prices also weakened in Japan as expectations firmed that the country will raise interest rates from 0%. The Bank of Japan, which has the lowest interest rates in the world, scrapped its deflation-fighting policy last week, the first step toward lifting borrowing costs. If interest rates worldwide rise, the Treasury market may no longer be considered the only safe haven in which foreign investors can get a real return. But the gap between rates in the U.S., the eurozone and Japan is still quite wide, and the fed funds futures contract is pricing in 100% odds that the Federal Reserve will take the overnight lending rate to 4.75% in March, according to brokerage Miller Tabak. The market has also priced in 100% odds that the funds rate will be 4.75% by the May 10 meeting, and 96% odds that it will be raised to 5.0% at that meeting.
"Global tightening is something that investors have in the back of their minds, but it's not the only driver today," says Dan Wuebben, senior bond market strategist at BNP Paribas, referring to a week full of economic reports. The data parade begins Tuesday morning with current account, retail sales and business inventories numbers. Economists at BNP believe will show a broad dip in sales following the blowout numbers for January. The market will look for readings on CPI, housing starts and the Federal Reserve's "beige book" report later in the week. David Ader, a bond market strategist at RBS Greenwich Capital, says that falling prices could continue to push yields further to the upside and "disinvert" the curve in the process. "Our view is that if this does pan out, it provides an ideal buying opportunity for a bullish
yield-curve inversion that will be the main story post the May refunding," he writes in a research note. A yield-curve inversion can imply that investors see more risk in the near term, and the event has preceded the nation's last two recessions. ( Click here for a full yield-curve explanation.) Wuebben agrees that last week and a half's steeper yield curve is not likely to last. Rather than a full-on inversion, the curve will "likely flatten as rates continue to go up and the long-term end sees continued healthy demand," he says. "We do expect a flattening. There's no question. We're just not so sure that it will be this week." But Federal Reserve Bank of San Francisco President Janet Yellen said Monday that an inverted yield curve does not forecast recession. She echoed comments made by former Fed head Alan Greenspan and current chairman Ben Bernanke that buying by foreign investors and pension funds has kept yields on the long end of the curve low in the face rate hikes on the short end. She made these comments in a speech to the National Association for Business Economics in Arlington, Virginia. Yellen is a member of the policy-setting Federal Open Market Committee.