(Bloomberg) -- Bond traders riding the U.S. yield curve flatter may want to buckle up: The trend could be on the verge of picking up some serious momentum.
The Treasury’s auction on Wednesday of $23 billion of 10-year notes drew the strongest demand in eight months, a signal that investors were content with a 10-year yield that’s right around its 2017 average. That appetite may bode well for the curve-flattening trade that’s driven spreads to the narrowest levels in a decade.
The sale left the maturity hovering close to its 200-day moving average of about 2.31 percent. Should the yield fall below that key technical level in coming days, BMO Capital Markets strategists see a clear path lower to 2.25 percent. Treasury futures are also testing the final Fibonacci defense of last month’s selloff, which, if broken, could signal gains ahead.
“The broader information within the auction results suggests strong demand for the new 10-year, even at these levels, which is consistent with the flattening,” BMO’s Ian Lyngen said in an interview after the sale. “I don’t think that the broader flattening move has completely run its course.”
The yield spread from two to 10 years fell below 67 basis points Wednesday, reaching the smallest in a decade and down from 84 basis points two weeks ago.
Spread Streak
With two-year yields likely holding steady as traders brace for an expected Federal Reserve rate hike in December, a decline to 2.25 percent for 10-year yields would probably flatten the curve by at least a few more basis points. That could extend a streak that’s lasted nine days, the longest since 2015.
The Treasury will also auction $15 billion of 30-year bonds Thursday. George Goncalves at Nomura Securities pointed out that last week’s Treasury refunding announcement, which favored increasing sales of shorter-maturity debt to fund deficits, could lead buyers further out the curve.
The 30-year bond is also flashing signs of being close to a technical breakout. The 10-day moving average of the yield crossed below the 30-day average Wednesday. In the three times that’s happened since the Fed raised rates in March, it’s preceded a rally. A well-received auction Thursday could confirm that trend.
“The power flattening of the yield curve is richening long end both outright and on the curve,” Goncalves, head of Americas fixed-income strategy at Nomura, wrote in a note. And yet, “the lack of macro events and a persistent low vol environment is also encouraging more duration taking.”
No matter how you slice it, everything is coming up flat for the Treasuries market.