Flattening U.S. Yield Curve Nears Decade Lows in Final 2017 Push
The U.S. yield curve is getting one final flattening push before calling it a year. The spread between the yields on 2-year and 10-year Treasuries narrowed to just 50.6 basis points Wednesday, close to the decade low reached on Dec. 6. While a small part of the more than six-basis-point narrowing is a function of the market shifting to a new benchmark 2-year note, the move is nonetheless one of the biggest single-session shifts of 2017. The gap between 5-year and 30-year yields also contracted as long bonds staged their biggest advance since September. The culprits behind this final flattening push appear to be money managers who need to tidy up their portfolios before 2017 finishes, with month-end duration extensions and quarter-end rebalancing both supportive of long-end Treasury buying. The duration on the Bloomberg Barclays U.S. Treasury Index will increase by 0.07 years next month, marginally higher than average for January, and fixed-income investors that track such benchmarks will likely follow suit by buying longer maturities.
China’s 14-day money rates jump to 4-year high on demand for year-end cash
China’s central bank has held back from injecting cash into the money market for five straight trading days, pushing a key money market rate to its highest level in four years as financial institutions look for funds through the year-end. The People’s Bank of China (PBOC) has refrained from injecting fresh funds via its open market operations since last Friday, citing liquidity in the banking system as “relatively high”. “With the increase of year-end fiscal expenditure, total liquidity level in the banking system will continue to be pushed higher even after countering maturing reverse repos,” The PBOC said in an online statement on Thursday. Maturing reverse repos have drained a total of 240 billion yuan ($36.65 billion) so far this week. The benchmark 14-day repo, considered one of the best indicators of general liquidity, opened at 10.00 percent and surged to a high of 12.00 percent at one point on Thursday, a level that was last seen in late December 2013. The volume-weighted average rate for the 14-day repo was 5.9773 percent, around 75 basis points higher than the previous close of 5.2306 percent on Wednesday, which was the highest since December 2014.
Italy’s bond yields hover around flat before auction
Italy’s 10-year borrowing costs were little changed on Thursday ahead of the last bond auction of 2017 which is seen as a key test of investor appetite for a country that will hold elections early next year. The Italian treasury plans to auction between five to seven billion euros of debt over four bonds on Thursday. President Sergio Mattarella is widely expected to dissolve parliament before the end of the week, mostly likely later on Thursday, clearing the way for national elections planned for early-March Italy’s ruling Democratic Party (PD), hit by internal divisions and a banking scandal, has been sliding in opinion polls, with a new survey on Saturday putting it more than six points behind the anti-establishment and eurosceptic 5-Star Movement. Having benefited from an extension of the European Central Bank’s ultra-easy monetary policy, Italian government bonds, known as BTPs, are seen as increasingly vulnerable to political risk.