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The Treasury yield curve flattened, with 30-year bonds outperforming shorter-dated debt, as traders moved toward a consensus that the Federal Reserve will raise interest rates next month.
The gap between yields on two- and 30-year debt narrowed to the flattest in a week. Yields on two-year notes, the coupon maturity most sensitive to Fed policy expectations, touched the highest since January as traders assigned about a 94 percent probability to a Fed boost at its final meeting of 2016, futures contracts indicate.
Expectations that President-elect Donald Trump will expand fiscal stimulus to boost economic growth sparked a bond-market rout that this week pushed U.S. 30-year yields to the highest in 2016. Those securities rallied Wednesday as a Labor Department report showed U.S. wholesale prices were unexpectedly weak in October. Since the election, a strengthening dollar and a surge in U.S. yields relative to those in Japan and Germany has boosted the allure of Treasuries.
"The market is firming in its expectations that the Fed is going to go," said Aaron Kohli, a fixed-income strategist at BMO Capital Markets Corp. in New York, one of 23 primary dealers that trade with the central bank. "I don't think the economic data is good this morning, but it also wasn't bad enough to deter the Fed. We sold off very sharply in the last week and a half, and there's some money that's being put to work."
Treasury 30-year bond yields fell two basis points, or 0.02 percentage point, to 2.94 percent as of 2:02 p.m. in New York, according to Bloomberg Bond Trader data. The 2.875 percent security due in November 2046 rose 9/32, or $2.81 per $1,000 face amount, to 98 22/32.
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U.S. two-year yields rose one basis point to 1.01 percent. The gap between two- and 30-year yields declined to about 1.93 percentage points. It touched as low as 140 basis points in August, the lowest since 2008.
The extra yield on U.S. 10-year notes relative to German equivalents surged this week to the highest since at least 1990, according to data compiled by Bloomberg. The gap between 10-year yields in the U.S. and Japan rose to the most in almost three years.
"Long-term Treasuries got extremely cheap and became an attractive investment for global investors," said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. "We had a substantial, significant backup in yields. They may have swung too far, too quickly."
Beyond December, swaps trading shows the expectation for a faster Fed policy-tightening cycle. Overnight index swap contracts implied the central bank's benchmark rate will be 1.23 percent in two years, compared with an expected 0.83 percent on Nov. 7, the day before the U.S. election.
The expected trajectory of Fed rate hikes "is all changing due to the growth prospect of a Trump administration," said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, a primary dealer. "The pressure in the Treasury market is going to continue until it becomes more clear what the plan is."