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Treasury Yield Curve Flattens Amid Fed Interest-Rate Speculation

June 13 (Bloomberg) -- The Treasury yield curve approached its flattest level in almost five years as investors speculated the Federal Reserve may raise interest rates sooner than forecast.

Longer-maturity bonds have outperformed this week as signs the U.S. recovery is uneven helped bolster demand for safer assets with extra yield. The difference between five- and 30- year yields fell toward the narrowest since 2009. President Barack Obama said he won’t rule out using air strikes to help Iraq’s government battle Islamic militants who threaten to ignite a civil war. The Standard & Poor’s 500 Index of shares fell the most in three weeks yesterday.

“There were a couple of Fed speeches earlier this week that were a little bit on the hawkish side,” said Andy Cossor, a market strategist in Hong Kong at DZ Bank AG, Germany’s fourth-largest lender. “That’s put upward pressure on yields in the five year. We’ve had the situation in Iraq getting a bit worse, retail sales on the poor side and the S&P was coming off the boil and I think those factors combined to give the longer- end of the Treasury curve a bit of a shove.”

A yield curve is a chart showing rates on bonds of different maturities.

The 30-year yield fell two basis points, or 0.02 percentage point, to 3.39 percent at 6:20 a.m. New York time, according to Bloomberg Bond Trader data. The 3.375 percent bond maturing in May 2044 rose 13/32, or $4.06 per $1,000 face amount, to 99 23/32. The rate dropped four basis points this week.

Yield Curve

Five-year yields added one basis point today to 1.70 percent, headed for a five basis-point weekly increase. The yield spread between five-year notes and 30-year bonds shrank four basis points to 169 basis points today, after contracting to 168 on May 2, the narrowest since September 2009.

Shorter maturities are more sensitive to what the Fed does with interest rates, and futures contracts show traders are betting policy makers will raise borrowing costs in 2015. Longer-dated debt is more influenced by the outlook for inflation.

The Bloomberg Global Developed Sovereign Bond Index returned 4 percent this year through yesterday, compared with a 4.6 percent loss in 2013.

Producer-price increases in the U.S. slowed to 0.1 percent in May from 0.6 percent in April, according to a Bloomberg News survey of economists before the government reports the figure today. The Thomson Reuters/University of Michigan preliminary sentiment index climbed to 83 for June from 81.9 the previous month, a separate survey shows.

Sales Rise

Retail sales advanced 0.3 percent in May, the Commerce Department said yesterday, half the gain projected by economists. Import prices, another gauge of inflation, increased 0.1 percent, also half the increase predicted.

The Fed is reducing its monthly bond purchases, while keeping the target for overnight lending between banks in a range of zero to 0.25 percent. Policy makers signaled at their April 29-30 meeting that interest rates will stay low for a “considerable time.” They next meet on June 17-18.

The central bank’s exit from stimulus has the potential to be problematic, Fed Reserve Bank of Boston President Eric Rosengren said in a speech in Guatemala City on June 9. That fueled speculation officials are more actively considering the process of policy normalization, according to DZ Bank’s Cossor.

The chance of a rate increase to 0.5 percent or more next year is 73 percent, according to data compiled by Bloomberg based on federal fund futures.

Oil Prices

Rising oil prices caused by tensions in Iraq threaten to slow the U.S. economy, said Will Tseng, a money manager in Taipei at Mirae Asset Global Investments Co., which has more than $58 billion in assets.

Oil for July delivery climbed to as high as $107.68 a barrel in electronic trading on the New York Mercantile Exchange, the most since September. The average over the past decade is about $79.

“Iraq will push oil higher, and that will hurt the growth momentum,” Tseng said. He bought 10-year Treasury notes this week, he said.

Benchmark Treasury 10-year note yields fell one basis point to 2.59 percent today.

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