Treasury Yield Curve Flattens on Williams Comments

Treasuries were mixed in late trading Tuesday as comments by San Francisco Fed President John Williams boosted the market-implied odds of a Fed rate increase in March, lifting short-maturity yields, while longer-dated debt benefited from month-end demand.

The two-year yield was higher by three basis points, while the 30-year yield was lower by 1.7 basis points as of 3:40 p.m. in New York. The yield curve from five to 30 years, which steepened after Johnson & Johnson joined the corporate-issuance calendar with a deal including 30-year bonds, subsequently flattened by more than four basis points. Ahead of President Donald Trump’s speech to Congress at 9 p.m. ET, the administration’s failure to reach agreement with congressional Republicans on tax cuts and budget principles remained in focus.

– Short-maturity yields reached session highs in late U.S. trading after Fed’s Mr. Williams said he expects an interest-rate increase to receive “serious consideration” when FOMC meets March 14-15.

– Monday’s trend of pricing in higher odds of a Fed hike in March continued Tuesday with selling of Dec. 17 eurodollars and April fed funds futures.

– Nine more Fed speakers, including Messrs. Fischer and Yellen on Friday, are slated to speak before Fed’s self-imposed media blackout ahead of a March 15 meeting.

– Monthly rebalancing of bond-market indexes was set to extend the duration of Bloomberg Barclays Treasury index by an estimated 0.11yr, potentially spurring buying.

– Dimming outlook for quick congressional action on Pres. Trump’s fiscal agenda, which helped drive gains for Treasuries last week, persisted as Mr. McConnell said Mr. Trump’s budget cuts probably can’t pass Senate; timing of tax cuts and other fiscal stimulus that Mr. Trump promised has been a principal driver of yields since Election Day.

– Long-end yields declined even as IG credit issuance slate totaled $23.5b including $4.5b J&J deal.

– Mixed U.S. economic data supported USTs in early trading; while 4Q GDP est. was unchanged at 1.9% vs median est. for a revision to 2.1%, personal-consumption component underwent bigger-than-forecast upward revision to 3%; separately, January trade deficit, a drag on 1Q growth, widened more than forecast to $69.2b.

– Data slate also included bigger-than-forecast increases in Chicago PMI and Richmond Fed Manufacturing, both for February.