Wires

TREASURIES-Yield curve steepens on trade fears, overnight risk-off

Kate Duguid

NEW YORK, Sept 30 (Reuters) - Longer-dated U.S. Treasury yields rose faster than those at the short end of the yield curve on Monday morning as trade concerns, among other factors, decreased investor appetite for risk.

China warned on Monday of instability in international markets from any "decoupling" of China and the United States, after sources said the Trump administration was considering delisting Chinese companies from U.S. stock exchanges. President Donald Trump's administration is considering the move, three sources said on Friday, in what would be a radical escalation of U.S.-China trade tensions.

The two-year note yield was up 0.2 basis point to 1.626%, with the benchmark 10-year note yield up 1.4 basis points to 1.687%. The moves widened the spread between the two- and 10-year note yields - the traditional measure of the yield curve - to 5.7 basis points.

Short-dated yields held steady despite softness in the Institute for Supply Management's Chicago Business Barometer, which dropped to 47.1 in September from 50.4 last month.

"It seems like we're seeing a really slight bear steepener. It's hard to get too much of a new fundamental read from this just because most of the information that has come out incrementally has been somewhat negative. The fact that it's quarter-end would normally see a flow into duration just with quarter-end rebalancing. So, whatever slight bearish impulse there is, is overwhelming that," said Jon Hill, U.S. rates strategist at BMO Capital Markets.

Hill pointed to several headlines overnight which may be driving the bear steepener on Monday morning including outgoing European Central Bank President Mario Draghi's interview with the Financial Times, in which he expressed the need for fiscal policy to support the bloc's long-term growth prospects. Euro zone bond yields jumped in response, with most 10-year government bond yields up 2-3 basis points, though weak inflation prints from Spain and German states limited the sell-off.

The curve steepening could also be attributable in part to the Bank of Japan's announcement on Monday that it could trim the size of its buying in long-term government bonds in October compared to September, while increasing its buying in short-date bonds. The move likely reflects the central bank's desire to keep the yield curve from flattening too much, as expectations of additional monetary easing steps keep long-term interest rates under downward pressure, analysts say.

"That helps explain why 10 and 30-year (Japanese government bonds) are selling off a couple basis points. It doesn't really help explain why Treasuries are off a few basis points," Hill noted. (Reporting by Kate Duguid Editing by Alistair Bell)