Treasury Yield Gap Set to Shrink, UBS Says: Technical Analysis

(Bloomberg) -- The difference between yields on Treasury 2- and 10-year notes is poised to plunge after falling below 240 basis points on July 31 and dropping out of a range it occupied since May, according to UBS Securities LLC.

“The 240 bps level is critical, as it represents the bottom of a channel as well as the first level of Fibonacci resistance,” Chris Ahrens, the Stamford Connecticut-based head of interest-rate strategy at UBS, wrote today in a note to clients. The firm is one of 18 primary dealers that trade with the Federal Reserve. A basis point is 0.01 percentage point.The move may mean the gap, the so-called yield curve, will shrink to 217 basis points and “lower,” Ahrens wrote. The curve flattened to 236 basis points on July 31, the lowest since May 21, as investors grew more comfortable holding longer-term securities, the value of which is eroded more when consumer prices rise. It was at 244 basis points today after touching 234 basis points.

“Last week’s aggressive flattening move brought it back to the bottom of a channel just in time for the next round of supply, issuance which will be predominantly focused on the long end of the yield curve,” Ahrens wrote.The curve reached a record high of 281 basis points on June 5 and touched this year’s low of 142 on Jan. 2, according to Bloomberg data. It touched 217.59 on May 6.

Treasury Auctions
The Treasury will release on Aug. 5 the amount it intends to raise at its quarterly refunding auctions of 3-, 10- and 30- year debt, to be held on three consecutive days beginning Aug. 11. It will sell $37 billion in three-year notes, $23 billion in 10-year securities and $15 billion in 30-year bonds, according to estimates from Wrightson ICAP LLC, a Jersey City, New Jersey- based research firm that specializes in government finance.Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. A failure to break through one level indicates the security may move to test the next.Technical analysts study patterns in charts to predict future moves. Resistance and support levels indicate areas where orders to buy or sell the securities may be placed.