Treasury yield curve widens to record

The difference between 2- and 30-year Treasury yields widened to a record as investors demanded higher compensation when buying longer-term securities on concern a strengthening US economy will spur inflation.

The so-called yield curve steepened to 3.96 percentage points yesterday, compared with an average of 2.07 percentage points the past 10 years. Treasuries fell yesterday as reports showed retail sales and industrial production both rose in December. The Federal Reserve will buy up to $21.5 billion in Treasuries next week, including inflation-indexed securities.

“Rates are headed generally higher from here as we see a slow recovery, trending higher,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

The yield on the 30-year bond rose five basis points, or 0.05 percentage point, to 4.53 percent, from 4.485 percent on January 7, according to BGCantor Market Data. The price of the 4.25 percent security due in November 2040 dropped 1/2, or $5 per $1,000 face amount, to 95 19/32.

Two-year note yields fell three basis points to 0.57 percent. The gap between the two securities is the highest since Bloomberg records on the data began in 1977.

Prospects for faster economic growth caused Treasuries to lose 2.67 percent last quarter, including reinvested interest, trimming the annual gain to 5.88 percent for 2010, Bank of America Merrill Lynch’s US Treasury Master index shows.

Improved outlook
Fed Chairman Ben S Bernanke said the increase in market interest rates in recent months reflects an improved outlook for the US economy. He spoke on January 13 at a forum in Alexandria, Virginia.

The US consumer-price index rose 0.5 percent in December from the previous month, more than the 0.4 percent median forecast in a Bloomberg News survey, data from the Labor Department showed yesterday. The so-called core rate, which excludes volatile food and fuel costs, rose 0.1 percent, in line with the median projection.

The US producer price index rose 1.1 percent in December, the most in 11 months, according to a Labor Department report on January 13.

Traders’ expectations for price increases rose almost to an eight-month high on speculation the Fed’s plan to add $600 billion to the economy will facilitate faster growth, Treasury Inflation Protected Securities showed.