Oh My! Bond Investors demand higher yield for longer terms - fear Inflation as USA recovers

Treasury 2- to 30-Year Yield Curve Widens to Record on Outlook

By Susanne Walker and Cordell Eddings

Jan. 15 (Bloomberg) -- The difference between 2- and 30- year Treasury yields widened to a record as investors demanded higher compensation when buying longer-term securities on concern a strengthening U.S. economy will spur inflation.

The so-called yield curve steepened to 3.96 percentage points yesterday, compared with an average of 2.07 percentage points the past 10 years. Treasuries fell yesterday as reports showed retail sales and industrial production both rose in December. The Federal Reserve will buy up to $21.5 billion in Treasuries next week, including inflation-indexed securities.

“Rates are headed generally higher from here as we see a slow recovery, trending higher,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

The yield on the 30-year bond rose five basis points, or 0.05 percentage point, to 4.53 percent, from 4.485 percent on Jan. 7, according to BGCantor Market Data. The price of the 4.25 percent security due in November 2040 dropped 1/2, or $5 per $1,000 face amount, to 95 19/32.

Two-year note yields fell three basis points to 0.57 percent. The gap between the two securities is the highest since Bloomberg records on the data began in 1977.

Prospects for faster economic growth caused Treasuries to lose 2.67 percent last quarter, including reinvested interest, trimming the annual gain to 5.88 percent for 2010, Bank of America Merrill Lynch’s U.S. Treasury Master index shows.

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Break-Even Rate
The difference between yields on U.S. 10-year notes and comparable TIPS, a gauge of traders’ outlook for consumer prices over the life of the securities, touched 2.41 percent on Jan. 12. The figure, known as the break-even rate, reached 2.42 percentage points on Jan. 5, the most since April 30. It was 1.47 percent in August.

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