Treasury Security Prices Plummet-Yield Spread Hits 17 Year High
US Treasury securities plummeted today on the lower than forecast demand for $13 billion in 30-year bonds. The gap in yields between the 2 year note and the thirty year bond has reached the highest margin since 1980. Thirty-year bonds rose 4 basis points to a yield of %4.46 and pre auction trading had the bonds at %4.5. Yields on the 2-year note also rose 4 basis points to a yield of 0.72%. The spread between the 30 year and the 2 year note was at 191 basis points by the end of the year, a far cry from the 368 basis points in today’s auction.
The spread is now 368 basis points, just one point below the high of 369 in 1992.
The ever-steepening yield curve reflects the Fed lowering short term rates as low as they can go and then piling up on the long end of the yield curve. The steeper curve shows investor’s diminishing demand for the bonds as they begin to fear faster than anticipated economic growth and inflation.
Last Friday Treasury officials announced their target was 6-7 years for the average maturity of outstanding Treasury debt, and a reduction in the issuance of 2 and 3 year notes. The shift to longer maturity may signal that investors want to be compensated with greater yield to offset inflation fears. The deficit is expected to reach to a record $1.4 trillion in 2010.
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March 27, 2010
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