U.S. Bond Market: Treasury Prices Fluctuate, Yield Curve Steepens

U.S. Treasury prices were mixed on Friday, with the yield curve steepening in a distorted manner while the 7-year sector was roughly unchanged. Short-dated bonds outperformed, with the 2-year yield falling below the 4% level in the morning, as somewhat dovish sentiment spread to the SOFR futures and options markets. Large block trades in 2-year Treasury futures further drove the steepening of the yield curve.

Shortly after 3:00 p.m. New York time, the yield curve’s short end was down as much as 7 basis points, while the long end saw yields rise by about 5 basis points on the day.

The steepening curve saw the 2-year/10-year and 5-year/30-year spreads close near their intraday highs, widening by nearly 10 basis points and 7 basis points, respectively. The 2-year/10-year spread broke above 50 basis points, with the widening pace the largest since Aug. 1.

In the U.S. morning session, SOFR futures trading volume was briefly higher than usual, while options fund flows with a somewhat dovish tilt further strengthened market expectations for a rise in yield-curve short-end prices. The close-of-day reception in the short-end swaps market also supported the 2-year sector, helping it outperform other tenors.

The Fed rate-hike premium was unwound, and by the close of the day, the swaps market showed cumulative rate hikes of only 7 basis points to the December FOMC meeting, versus 16 basis points at Thursday’s close.

In the morning session, block buying in 2-year Treasury futures provided support for short-dated notes; at 11:38 a.m. Eastern time, there was a $605,000/DV01 buy order.

U.S. Treasury performance decoupled from the rise in oil prices. In the late session, WTI crude oil futures were up about 5%, as traders prepared for the Iran war to continue into April.

At 3:15 p.m. Eastern time,

The 2-year Treasury yield was 3.9098%;

The 5-year Treasury yield was 4.0667%;

The 10-year Treasury yield was 4.4358%;

The 30-year Treasury yield was 4.979%;

The spread between the 5-year and 30-year Treasury yields was 91.06 basis points;

The spread between the 2-year and 10-year Treasury yields was 52.18 basis points.

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