BOND REPORT: 30-year Treasury Yield Notches Largest Weekly Fall In More Than 3 Months
July 21 2017 - 04:39PM
Dow Jones News
By Sunny Oh
Investors await next week's Fed policy meeting
Treasury yields extended their descent Friday, capping a
weeklong decline, after a spate of weak economic data, concerns
over inflation expectations, and dovish central bank speeches drew
investors into U.S. government paper.
The 30-year bond yield fell 3.7 basis points to extend a
weeklong 10.8 basis point drop to 2.802%, the largest five-day drop
since March 24. Bond prices move inversely to yields; one basis
point is one hundredth of a percentage point.
The yield on the 10-year Treasury note slumped 3.4 basis points
to 2.232%, contributing to a 8.7 basis point fall over the week.
While, the 2-year note's yield edged lower 1.1 basis points on
Friday and 1.6 basis point over the week.
Since Fed Chairwoman Janet Yellen testified to Congress
midmonth, a run-up has taken over in both bonds and stocks. The
S&P 500 gained around 2%, while the 10-year yield has slipped
more than 10 basis points. Yellen's note of caution over months of
lackluster inflation has led investors to expect a slower pace of
monetary tightening that could extend this "Goldilocks" environment
that supports both assets.
Also read: Stock market and bonds rallied at the same time, and
it's befuddling investors
(http://www.marketwatch.com/story/bonds-and-the-stock-market-are-rallying-at-the-same-time-and-its-befuddling-investors-2017-06-02)
Moreover, the economic data that would have otherwise supported
expectations for higher core inflation have also come up short.
Falling import prices
(http://www.marketwatch.com/story/falling-import-prices-show-that-barely-any-inflation-is-coming-into-the-us-from-abroad-2017-07-18)
and a lower-than-expected reading on the home builders' index
(http://www.marketwatch.com/story/builder-sentiment-stumbles-to-8-month-low-on-higher-lumber-costs-2017-07-18)
have all taken a toll on inflation expectations.
On Friday, Treasury yields were weighed on by risk-off sentiment
in Europe after currency markets cast doubt on just how dovish the
European Central Bank can be despite President Mario Draghi
emphasis on the lack of a pickup in underlying inflation.
The strengthening euro, which reached a 2-year high on Thursday,
(http://www.marketwatch.com/story/euro-sits-at-2-year-high-as-hawkish-view-on-ecb-dominates-2017-07-21)slammed
European equities to the benefit of the region's bonds. Flighty
investors rotated out of stocks to the embrace of government paper
on concerns that the currency's surge would hamper exports.
The 10-year German bund slipped 2.8 basis points to 0.502%,
while the Stoxx Europe 600 slipped about 1% lower.
Check out: European stocks log worst daily drop in 3 weeks as
euro rallies
(http://www.marketwatch.com/story/european-stocks-struggle-to-break-grip-of-stronger-euro-2017-07-21)
"It's about the risk-off sentiment emanating from Europe," said
Aaron Kohli, fixed-income strategist at BMO Capital Markets.
Treasury yields tend to follow German bunds as interconnected
financial markets have allowed traders to arbitrage interest-rate
differential between countries.
U.S. government paper also received a tailwind after reports
said
(http://www.marketwatch.com/story/trump-lawyers-discussing-pardons-ways-to-undermine-russia-probe-report-2017-07-20)
President Donald Trump's lawyers were investigating how to
undermine the special counsel inquiry led by former FBI Director
Robert Mueller. The move drew a modest flight-to-safety bid as
geopolitical concerns from the White House refuse to abate. Trump's
pro-growth agenda has been sidelined as he struggles with
allegations that members of his campaign team colluded with
Moscow.
Looking ahead to next week, traders will closely eye the policy
meeting for the Federal Open Market Committee, the Fed's
interest-rate-setting body. Economists have downgraded expectations
that the central bank would announce the beginning of its balance
sheet reduction soon. Some said they did not expect changes to the
policy language, but it could include tweaks to their current
outlook for the economy.
"Some folks may think the Fed could alter their inflation
language, but we think material changes will only help cement the
markets' worry about inflation," said Tom Porcelli, chief U.S.
economist for RBC Capital, said in a note to clients.
(END) Dow Jones Newswires
July 21, 2017 16:24 ET (20:24 GMT)
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