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Treasury yield curve hits flattest in 11 years as central bankers descend on Jackson Hole

via Sunny Oh

Short-dated Treasury yields rose Thursday, while long-dated yields fell, as attention turns to the Kansas City Federal Reserve’s annual symposium for global central bankers and other monetary policy experts in Wyoming, where investors will look to glean clues on the rate-hike outlook.

The 10-year Treasury note yield TMUBMUSD10Y, +0.00% was mostly flat at 2.821%, hovering near its lowest since May 29, while the 30-year bond yieldTMUBMUSD30Y, -0.44% fell 1.3 basis points to 2.974%. The shorter 2-year note yield TMUBMUSD02Y, +0.16%  rose 1.4 basis points to 2.610%. Bond prices move in the opposite direction of yields.

The yield gap between the 2-year and the 10-year note narrowed 1.6 basis points to 21.1 basis points, or 0.211 percentage point, its tightest since August 2007. A flattening yield curve, reflected in a narrowing spread between short-term maturities and their long-term peers, can signal growth fears, but also expectations for tighter monetary policy.

As the Jackson Hole symposium kicks off, the Fed will attract most of the spotlight for the bond market. Fed Chairman Jerome Powell’s Friday speech is expected to be the highlight, with investors hoping for more clarity on the central bank’s monetary path and the potential impact on emerging markets-—a region that has been beset by a stronger dollar, higher rates and diminished liquidity.

“Recently their tone has been shifting into a more dovish and more cautious tone. There’s been more of a slowdown globally than was anticipated,” said Paula Solanes, senior portfolio manager at SVB Asset Management.

Minutes from the Federal Open Market Committee’s August meeting on Wednesday all but confirmed a third rate increase in September. Investors will be looking for signs of what would derail the central bank’s commitment to a gradual rate-hike path, amid the growing downside risks, including trade tensions and the waning boost of recent fiscal stimulus measures. Fed Chairman Jerome Powell’s speech on Friday could help address those concerns.

”The policy challenges are getting more difficult in the next 12 months. The trade situation has escalated in recent months, we’re carefully watching how the Fed incorporates that into their thinking. If tariff measures push up inflation, and slow growth that’s not a straightforward policy conundrum,” said James McCann, senior global economist at Aberdeen Standard Investments.

Kansas City Fed President Esther George said on Thursday she supported two more rate increases this year. George is a voting member of the FOMC because she will cover for the vacant seat in San Francisco Fed President, giving her a vote for the next 1 1/2 years.

Dallas Fed President Robert Kaplan said he was hopeful the central bank could hit the neutral rate, where interest rates neither speed up nor slow down the economy, without inverting the yield curve.

On the data front, weekly jobless claims for the week ending Aug. 18 came in at 210,000, below the 215,000 forecast from economists polled by MarketWatch, while new home sales number for July ran at annualized pace of 627,000, below the median forecast of 640,000.

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