The U.S. Treasurys yield curve flattened on Monday, with long-dated debt prices gaining while intermediate-dated debt prices fell, before the U.S. government sells $96 billion in new debt to investors nervous that the Federal Reserve may raise interest rates sooner than expected.
Short and intermediate-dated Treasurys yields have jumped since Federal Reserve Chair Janet Yellen said Wednesday that the central bank could raise rates six months after its current bond-buying program ends, suggesting a potential hike could happen as early as spring of 2015.
"You're seeing a lot of activity in terms of curve trading, money migrating ... out of the front-end and into the long end of the market," said Richard Bryant, a managing director in Treasuries trading at Mizuho Securities in New York.
"The market's interpretation is that they are moving up the timing in terms of rate hikes."
Two-year note yields rose as high as 0.47 percent on Monday, the highest since September and up from 0.34 percent before Yellen's remarks.
Five-year note yields increased to 1.77 percent, the highest since January 9 and seven-year note yields rose to 2.34 percent, the highest since January 23. The notes pared much of these losses to then trade flat as 10-year notes and 30-year bond prices turned positive.
Benchmark 10-year notes were last up 3/32 in price to yield 2.74 percent, having risen as high as 2.78 percent earlier on Monday.
The yields have risen from around 2.66 percent since Yellen's comments. For the 30-year bond, prices rose 21/32 in price to yield 3.57 percent, down from 3.70 percent earlier on Monday.
The yields have fallen from 3.62 percent before Yellen's comments. Shorter-dated Treasurys also underperformed longer-dated bonds as investors continued exiting trades that had bet that the Treasuries yield curve would steepen.
The spread between two-year notes yields and 30-year bonds yields tightened to 313 basis points, the narrowest since July. That spread had widened to 367 basis points in November.
Demand for intermediate-dated debt will be tested this week, with the Treasury due to sell $32 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday, in addition to $13 billion in reopened two-year floating rate notes on Wednesday.
Weak technicals are adding to pressure on the market, with five-year notes breaking above support levels for yields of around 1.72 percent, said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee.
"That has people nervous in front of supply on Wednesday for fives," he said.
Corporate bond spreads, meanwhile, have tightened even as Treasurys sell off, reflecting that investors are continuing to accept lower returns for higher risks as they seek out any incremental yields offered in fixed income products.
Investment-grade corporate bond spreads narrowed to 1.20 percentage points over Treasurys on Friday, the lowest since 2007, while high-yield corporate bond spreads also fell to 3.76 percent points, near their lowest level since 2007, according to data by Merrill Lynch.
Corporate bonds have been among the favorite investments of pension funds and other investors struggling to hit high return targets in a low interest rate environment. The Fed bought $648 million in Treasuries due from 2024 to 2031 on Monday as part of its ongoing purchases.