2-Year treasury yield posts largest weekly climb in three weeks – marketwatch seagate data recovery

The yield curve is often tracked as a measure of sentiment about the economy’s overall health. In a normal environment, the yield curve steepens because investors tend to demand a higher yield for lending further into the future, while a flattening curve is read as a sign that investors are worried about the longer-term outlook. What’s driving the market?

Signs of tepid inflation, which is when elevated can erode the value of a bond’s fixed payments, helped to drive buying in long-dated government paper, pushing yields lower. Bonds with extended maturities tend to be the most sensitive to the corrosive impact of stronger price pressures.

On Thursday, consumer-price inflation data for April rose 0.2%, below the forecast of a 0.3% increase from economists polled by MarketWatch. Its core gauge, stripping out volatile food and energy prices, rose 0.1%, keeping its yearly increase at 2.1%

Meanwhile, yields of longer-dated bonds have compressed somewhat against their shorter-dated counterparts in the face of a series of bond auctions, with investors successfully taking down a $17 billion auction of 30-year bonds Thursday afternoon, which followed a $25 billion sale of 10-year notes produced on Wednesday. All totaled, about $73 billion in government debt was sold amid growing deficits that have prompted the Treasury Department to ramp up issuance this year.

That has given encouragement to the bond bulls who saw the market take down the bump in supply without much indigestion. The Treasury Department announced increases to the size of bond auctions starting from May, which had some investors concerned over the potential for a buyer’s strike, pushing up yields.

Bond traders also were paying attention to political developments in Europe, with Italy’s far-right League party and populist 5 Star Movement moving closer to creating a coalition government, potentially putting an end to more than two months of political gridlock, but also putting in power antiestablishment parties that could roil the eurozone in the future.

“In an environment of a creeping acceleration in inflation, residual QE-driven demand for duration and a relatively modest increase in supply out the curve, the bid out the curve again reappeared when the 10-year flirted with 3% and the bond flirted with 3.22%,” said Ward McCarthy, chief financial economist for Jefferies.

“The combination of lower than expected inflation and overall good demand at this week’s refunding drove the US curve flatter. The 2/10Y was 4bp down, reaching 43bp and the 5/30, another closely watched measure of the curve shape, fell to 28bp,” wrote analysts at UniCredit in a Friday report.

“Strictly speaking, this is the lowest level since September 2007 although at that time the curve was already in bull steepening mode. A better reference is early 2007, when the Fed policy rates were at the peak of the tightening cycle. As we have been arguing for some time, we expect curve flattening to continue in the coming quarters,” the analysts wrote. A bull steepener refers to changes in the yield curve caused by short rates falling faster than their longer-dated counterparts. What data and Fed speakers are in focus?

St. Louis Fed President James Bullard said the labor market was not overheated, and said in it s current state was unlikely to spark a break out of inflation. Bullard isn’t currently a voting member on the rate-setting Federal Open Market Committee. Which assets are also in focus