BOND REPORT: Treasury Yields Rise As Investors Expect Fed To Wind Down Balance Sheet
September 18 2017 - 11:16AM
Dow Jones News
By Sunny Oh
Fed policy makers will wrap up a 2-day meeting Wednesday
Treasurys pulled back Monday, pushing yields higher, as
investors await a meeting of Federal Reserve policy makers that's
expected to begin the process of winding down the central bank's
balance sheet.
The benchmark 10-year Treasury yield ticked higher to 2.228%,
versus 2.202%. The 2-year Treasury note yield was up to 1.397%,
after settling at 1.384% late Friday, while the 30-year bond yield
rose to 2.799%, compared with 2.772% on Friday.
Bond prices move inversely to yields.
The Federal Reserve is expected to kick-start the reduction of
its balance sheet on Wednesday. But some say with so much of the
plan articulated and anticipated beforehand, the bond market
reaction would be muted.
"It's very likely to be initially greeted with a collective yawn
from markets, if only because it has been so well choreographed,"
said Ian Lyngen, head of U.S. rates strategy for BMO Capital
Markets, in a note to clients.
See: Why the bond market isn't freaking out from the Fed's shift
to quantitative tightening
(http://www.marketwatch.com/story/why-the-bond-market-isnt-freaking-out-from-the-feds-shift-to-quantitative-tightening-2017-09-14)
Instead, analysts highlighted that changes to the dot plot,
individual Fed members forecasts for future interest rates, could
unsettle investors. In addition, the risk is that Federal Reserve
Chairwoman Janet Yellen "takes a more dismissive line toward the
downside surprises in the inflation data," wrote Matthew Hornbach,
an interest-rate strategist for Morgan Stanley.
Read:Fed to take historic leap into the unknown
(http://www.marketwatch.com/story/fed-to-take-historic-leap-into-the-unknown-2017-09-14)
He said if Yellen aligns with New York Fed President William
Dudley it could give a rude shock to those who feel economic data
should play a bigger role in dictating policy. In a speech two
weeks ago, Dudley reaffirmed his desire to see a December rate
increase even after he acknowledged the last few months of soft
inflation readings.
Also read: Fed's Dudley shows no signs of wavering from support
for December interest-rate hike
(http://www.marketwatch.com/story/feds-dudley-shows-no-signs-of-wavering-from-support-for-december-interest-rate-hike-2017-09-07)
But last week's stronger-than-expected inflation number
(http://www.marketwatch.com/story/higher-rents-gas-boost-inflation-in-august-cpi-shows-2017-09-14)could
give Yellen and other Fed members the support they need to raise
interest rates one more time this year, especially if the bounce in
consumer prices persists into a more substantial uptrend.
As the Fed is expected to embark on a form of monetary
tightening, other central banks are nowhere near taking their feet
off the pedal. The Bank of Japan is likely to maintain its
so-called yield curve control policy, where it targets certain
interest rates in the bond market through asset purchases, at
Thursday's meeting.
Political risks failed to abate as President Donald Trump is
slated to speak on Tuesday at the United Nations. Though Secretary
of State Rex Tillerson has said he is pursuing "a peaceful
solution"
(http://www.marketwatch.com/story/us-is-looking-for-a-peaceful-solution-to-the-north-korea-crisis-says-rex-tillerson-2017-09-18)
to the tensions in the Korean Peninsula. Ambassador Nikki Haley
suggested Trump's previous threats of raining down "fire and fury"
(http://www.marketwatch.com/story/how-trumps-threat-of-fire-and-fury-is-rattling-stock-market-calm-2017-08-09)
on the North Korean regime were not empty threats.
""If North Korea keeps on with this reckless behavior, if the
United States has to defend itself or defend its allies in any way,
North Korea will be destroyed," she said.
But recently, the impact geopolitical concerns from North Korea
has had on markets seem subdued. After the regime launched its
international continental missile over Japan, investors didn't
blink, with yields staying relatively unchanged on Friday
(http://www.marketwatch.com/story/short-dated-treasury-yields-rise-as-traders-await-data-deluge-fed-meeting-2017-09-15).
Elsewhere, Portuguese bonds rallied, with the 10-year government
bond yield plummeting 27 basis points after S&P Global Ratings
raised Portugal's credit rating to "investment-grade" status on
late Friday. The ratings company boosted the country's growth
forecast to an annual 2% between 2017 and 2020, also reflecting the
"solid progress [Portugal] has made in reducing its budget
deficit."
(END) Dow Jones Newswires
September 18, 2017 11:01 ET (15:01 GMT)
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