Treasury Yield Curve Looking More Normal as 30-Year Rate Rises Above 10-Year Rate

The slope of interest rates in the Treasury bond market is getting back to normal--another sign that investors believe the Federal Reserve is finished tightening credit.

On Thursday, the yield on the 30-year T-bond, at 5.82%, was above the yield on the 10-year T-note, at 5.78%, for the first time since January.

Since that time, the so-called Treasury yield curve had been “inverted,” meaning that longer-term yields were below shorter-term yields.

Normally, longer-term bonds yield more than shorter-term issues because investors expect to be paid more to tie up their money for a longer period.

A yield-curve inversion often occurs when the Fed is tightening credit by raising short-term interest rates. Long-term yields may fall below short-term yields in such situations if investors believe the Fed will in fact be successful in taming inflation--which is the biggest threat to the value of long-term bonds.

This time around, longer-term Treasury bond yields also were depressed by the Treasury’s debt-buyback program, which led many investors to believe that longer-term bonds would soon be in short supply.

But now, with increasing signs that the economy is slowing, higher shorter-term bond yields are attracting buyers--putting downward pressure on those yields as investors bid more for the bonds to lock in those rates.

“The shorter maturities have a lot more potential with prospects of Fed rate increases diminishing every day,” said Joseph Pregiato, co-head of institutional fixed-income sales at Josephthal & Co.

“More and more we are taking the Fed out of the picture for an extended period,” especially as we are entering a period of soggy [consumer] demand,” said Dominic Konstam, head of interest rate research at Credit Suisse First Boston in New York.

Since Aug. 17 the yield on the two-year T-note has fallen from 6.32% to 6.10% as of Thursday.

Meanwhile, the 30-year T-bond yield has risen from 5.71% to 5.82% in that period.

On Thursday, the 30-year T-bond yield jumped from Wednesday’s 5.73%, in part because of an expected avalanche of long-term corporate bonds from European telecom companies. That is causing some portfolio managers to sell Treasury bonds to make room for the higher-yielding corporate issues, traders said.

Technical-oriented trading also is causing bond yields of various maturities to gyrate, as bond traders reverse bets they had made about how long the 10-year T-note yield would stay above the 30-year T-note yield.

As recently as late July, the 10-year T-note yielded 6.03% while the 30-year T-bond yielded 5.78%.