Global growth worries, higher oil flatten yield curve

NEW YORK (Reuters) – The Treasury yield curve flattened on Wednesday afternoon as shorter-dated yields rose on higher oil prices, while at the long end, the benchmark 10-year U.S. government bond was driven to an 11-month low by concerns about a global growth slowdown.

Investors piled into safe-haven investments like longer-dated Treasuries and German bunds after weak data out of Asia and Europe was reported overnight and a partial shutdown of the U.S. government continued.

“The rebound in oil prices is starting to push yields higher at the front end,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

“The back end is mostly reacting to broader themes in the market – the slow-down, the (economic) news out of China, the ongoing negotiations over the U.S. government shut-down,” said Rajappa.

The 10-year Treasury yield US10YT=RR was down 3 basis points, last at 2.66 percent, approaching the key level of 2.64 percent, a retracement of 50 percent from the 2018 high yield of 3.25 percent. Other safe-haven investments also benefited in price from the flight to quality.

The benchmark 10-year German government bond yield DE10YT=RR was down 8.4 basis points, last at 0.16 percent. Although U.S. stocks opened sharply lower on Wednesday, the S&P 500 index .SPX has retraced most of its losses, down 0.24 percent. The Dow Jones Industrial Average .DJI was last down 0.49 percent.

“Chinese PMI came in weaker than expected and gave a risk-off tone to global markets. There are now mounting concerns about global growth,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald.

China’s factory activity contracted for the first time in 19 months in December, hit by the Chinese-U.S. trade war, the private Caixin/Markit PMI survey showed, with the weakness spilling over to other Asian economies.

The grim readings come ahead of the closely watched U.S. manufacturing survey on Thursday, payrolls data on Friday and the U.S. earnings season later this month, which is expected to show corporate profit shrank in the October-December quarter.

Oil prices rose about 4 percent in choppy trading on Wednesday, supported by gains in U.S. equity markets, but concerns remained about rising crude production and weakening global economic growth.

The yield on the two-year Treasury note US2YT=RR rose on the back of oil prices, last up about half a basis point to 2.504 percent. Yields on long-dated maturities fell more than those at the short end rose, flattening the yield curve to a spread of 15.2 basis points between the two- and 10-year note yields US2US10=TWEB.