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Bond Traders Bet Yield-Curve Steepening Has More Steam

(Bloomberg) -- As Treasuries traders reap profits on yield-curve steepener bets, Wall Street says the wagers have more juice.

The spread between 5- and 30-year yields climbed to the highest level in a year last week. With the days ahead bringing key U.S. economic data and another round of speeches from Federal Reserve policy makers, analysts say the risks are skewed toward further widening.

Rate-hike expectations are unlikely to budge much, so it will be difficult for the curve to flatten even if February payrolls data set for release Friday show surprising strength, according to Vanguard Group’s Anne Mathias. Markets are pricing in little change for the Fed through 2019, and policy makers are signaling they’ll be patient when it comes to adjusting rates. That should anchor short-maturity yields relative to those on long-dated debt, pointing to a steeper curve, by Mathias’s calculus.

Bond Traders Bet Yield-Curve Steepening Has More Steam

“Over the last month, the Fed has really communicated that they have no interest in hiking aggressively,” said Mathias, senior global rates and FX strategist at Vanguard. “Stronger data is not likely to be met by rising yields at the short-end.”

Thirty-year yields touched a 2019 high of 3.14 percent Friday amid a flood of high-grade corporate issuance and stronger-than-anticipated U.S. gross domestic product figures. The spread over five-year debt swelled to about 60 basis points last week. The long-end slump spurred activity in options, with traders targeting 30-year yields to climb beyond 3.33 percent.

Gennadiy Goldberg of TD Securities doesn’t see much to interrupt that trend this week. The U.S. likely added 185,000 jobs in February, according to a Bloomberg survey, down from January’s 304,000. Average hourly earnings are expected to increase by 3.3 percent on a yearly basis, close to the fastest acceleration since 2009.

But even a robust report is unlikely to meaningfully boost tightening expectations, according to Goldberg. Fed Chairman Jerome Powell gave traders little reason expect further tightening last week.

“The degree of market pessimism has made it very difficult for the curve to flatten as the market refuses to price in rate hikes,” Goldberg said. “There’s a high threshold for the market to price in even significant odds of one hike.”

What to Watch

  • Friday’s payrolls report is the highlight for U.S. economic data releases, and traders will also get a look at the latest Beige Book on Wednesday.
  • Here’s the calendar for economic releases:
    • March 4: Construction spending
    • March 5: Markit services PMI; ISM services index; new-home sales; monthly budget statement
    • March 6: Mortgage applications; ADP employment; trade balance
    • March 7: Challenger job cuts; initial jobless claims; non-farm productivity; Bloomberg consumer comfort; household net worth; consumer credit
    • March 8: Employment data; housing starts/building permits
  • A number of Fed officials take the stage, with a Friday night appearance by Chairman Powell scheduled:
    • March 5: Minnesota Fed’s Neel Kashkari; Richmond Fed’s Thomas Barkin
    • March 6: New York Fed President John Williams speaks to Economic Club of New York; Cleveland Fed’s Loretta Mester
    • March 7: Fed Governor Lael Brainard
    • March 8: Powell discusses monetary policy normalization and review
  • Treasury will auction bills this week: 3- and 6-month bills on March 4; 4- and 8-week bills on March 7

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