14.12.201723:46:00UTC+00U.S. Yield Curve Further Flattens on Rising Fed Hike Expectations

Yields on long-dated bonds declined, while short-dated yields rallied after the publication of strong economic data, however, weak expectations for future inflation increased the possibility that the Federal Reserve would tighten monetary policy at a more aggressive rate in 2018.

The 10-year Treasury yield edged up 0.7 basis point to 2.346 percent. Meanwhile, the two-year note yield advanced 2.4 basis points to 1.811 percent. The yield on the long bond or the 30-year note rose 2.8 basis points to 2.710 percent.

The yield curve flattened after the U.S. central bank's estimates and economic projections on Wednesday underlined the Fed's willingness to normalize monetary policy despite the weakness in inflation. Investors said expectations of more hikes have accelerated the curve's flattening as it showed that the Fed would not wait for inflation to pick up before making a move.

Long-dated yields were also limited after ECB President Mario Draghi echoed his traditional dovish comments, stating that an “ample” level of stimulus was required to bolster inflation. This dashed expectations that the central bank would make changes to its language from easing to tightening in anticipation of a sure exit to its bond purchasing program in September 2018.