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TREASURIES-Yield curve steepens ahead of month-end rebalancing

Kate Duguid
·2 min read

By Kate Duguid

NEW YORK, Nov 30 (Reuters) - The U.S. Treasury curve steepened on Monday morning despite the fact that traders will this afternoon have to rebalance their portfolios for month-end, an event which typically drives longer-dated yields lower.

The spread between the two- and 10-year Treasury yields , one measure of the yield curve, was 1.5 basis points wider on Monday at 69.7 basis points. The spread between the five- and 30-year yields, which measures a separate section of the yield curve, was last 1.3 basis points wider at 121.6.

Traders must rebalance their portfolios at the end of the month, which can sometimes lead to market moves that are out of sync with news and economic data. The maturity of a bond portfolio falls at the end of the month as bonds move closer to their maturity date. In order to rebalance, traders buy longer-dated debt, which drives yields lower.

"From here, our expectations for an outsized month-end bid that redefines direction of U.S. rates are limited; if anything, the last day of November will simply serve to offset the momentum of the steepening," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

The development of two COVID-19 vaccines by Pfizer and Moderna have bolstered investor expectations for an economic recovery in 2021. Those hopes have sent yields at the long end of the Treasury curve higher. Since the first vaccine announcement on Nov. 9, the benchmark 10-year yield has risen by about 3 basis points.

On Monday, bullish bets that the 10-year Treasury will rise, as measured by the value of CFTC net speculative long position in 10-year futures, rose to the highest since mid-October.

Some analysts have speculated that the Fed would buy more longer-dated debt to prevent those yields from rising further. Notes from the Fed's last policymaking meeting indicate some FOMC members have also discussed the possibility. But the steeper curve and large futures position indicate the market isn't convinced the move will happen anytime soon.

"I'm not in the camp that believes the Fed is going to change asset purchases in December, said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald. He suggested the Fed may adjust their purchases if the 10-year yield rises above 1% and the 30-year above 1.8%, but neither of those levels have been hit since March.

"I wouldn't be surprised if we chop around here for the rest of the year," Lederer said. (Reporting by Kate Duguid; editing by Jonathan Oatis)