By Mark DeCambre, MarketWatch , Sunny Oh
10-year Treasury yield nears 2.20% as tax reform prospects
increase
U.S. Treasurys picked up where they had left off, pushing yields
higher Wednesday as investors continued to rotate out of government
paper and other assets perceived as less risky, while traders
looked ahead to consumer price data.
Some analysts are betting that a recent bipartisan effort to
lift the debt ceiling suggests that President Donald Trump has
grown more willing to reach across the aisle to get pro-business
policies, including tax reform, enacted. Late Tuesday, Trump had
dinner with three Democratic senators
(http://www.marketwatch.com/story/trump-today-president-prods-congress-to-move-fast-on-tax-deal-and-sets-meeting-with-schumer-pelosi-2017-09-13)
who were reportedly open to the idea of tax reform.
But other market participants suggested they weren't holding
their breath, with Trump having yet to achieve any of his major
priorities since his inauguration. Treasury prices have rallied
since the beginning of the year on subdued concerns that his
pro-growth agenda would spur inflation.
"The jury is still out on getting something done," said Marvin
Loh, senior fixed-income strategist for BNY Mellon.
The yield on the short-term two-year Treasury note added 2 basis
points to 1.355%, its highest level since Aug. 8. The 10-year
Treasury note yield was slightly higher at 2.194%, compared with
2.171% late Tuesday in New York, but still markedly higher relative
to its levels last week. Meanwhile, the 30-year Treasury yield rose
2 basis points to 2.749%, versus 2.774%.
Bond prices and yields move in the opposite direction.
Long-dated Treasurys notched their third straight session of
losses as bond investors unwound haven plays seen last week. The
10-year Treasury yield had ducked under 2.10% on concerns about
tensions between North Korea and the U.S. and the impact of
Hurricanes Irma and Harvey on the overall economy. The recent yield
rise suggests, however, that traders are lowering the odds of any
lasting effect on the economy and markets.
The waning of those fears has rejuvenated appetite for assets
perceived as risky and pushed the Dow Jones Industrial Average ,
the S&P 500 index and the Nasdaq Composite Index to their first
day of simultaneous records
(http://www.marketwatch.com/story/sp-primed-to-build-on-all-time-high-as-clock-ticks-down-to-apple-event-2017-09-12)
since late July on Tuesday. All three indexes closed at record
highs for a second day in a row Wednesday.
"With the better risk-on environment, we've completely reversed
the yield compression from last week," said Loh.
Assets perceived as haven investments other than government
paper also sustained losses. The yen traded against the dollar at
Yen110.56 from Yen110.17 on Tuesday in New York, while gold prices
shed $4.60, or around 0.35%, to $1,323.40 per ounce.
The Labor Department's producer-price index for August showed a
0.2% increase, below the average estimate for a 0.3% rise, in a
survey of economists by MarketWatch. The rebound follows a drop of
0.1% for July
(http://www.marketwatch.com/story/us-wholesale-inflation-fall-01-in-july-first-decline-in-almost-a-year-2017-08-10),
which marked the first decline in almost a year.
Over the past year, producer prices have decelerated to a 1.9%
annual rate, and have steadily dipped from a high of 2.5% in April.
The July annual rate has been the lowest since January.
Muted inflation can encourage buying in government paper because
rising inflation erodes a bond's fixed value, particularly in
longer maturities. But analysts say that new changes to how
producer prices are computed has weakened their correlation with
consumer price inflation, arguably the more important figure.
August CPI data is due Thursday.
See: Inflation data could look better than expected Thursday,
analyst says
(http://www.marketwatch.com/story/inflation-data-could-look-better-than-expected-thursday-analyst-says-2017-09-13)
"Rising input prices are on our radar as a medium-term concern,
but less as an inflation driver and more as a risk to corporate
profitability," said Ian Lyngen, head of U.S. rates strategy for
BMO Capital Markets, in a note to a clients. Higher producer prices
could crimp earnings, leading firms to cut staff to protect profit
margins. This could, in turn, reflect an economy that is at the
tail end of its expansion.
Soggy inflation has been the biggest bugaboo for global central
bankers and bond investors alike. In theory, inflation and rising
prices should coincide with a U.S. job market that has looked
mostly healthy. However, the annual rate of inflation has fallen
below the Federal Reserve's 2% target, providing some headwinds to
the central bank's plan to normalize monetary policy by lifting
rates and unwinding its $4.5 trillion asset portfolio.
Presently, the market is pricing in a roughly 47% chance of one
more rate increase by the Fed before the end of 2017, having fallen
as low as 23% last week, according to CME Group Data
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
For all the importance placed on this week's inflation data,
traders could be hesitant to make big moves ahead of the central
bank's policy-setting meeting next Tuesday and Wednesday, where a
change in policy and rates is not anticipated but where further
clues about the game plan for the Fed will be closely watched.
The Treasury Department added another weak auction of 30-year
bonds, to bookend a string of lackluster debt sales this week,
perhaps reflecting a lowered outlook for risks that had driven bond
prices higher and yields lower over the past several sessions.
In exchange-traded products, the popular iShares 20+ Year
Treasury Bond ETF (TLT) was down slightly at 0.4%. The fund, also
known as TLT for its ticker symbol, has risen 6% so far this
year.
(END) Dow Jones Newswires
September 13, 2017 19:15 ET (23:15 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.