BOND REPORT: 2-year Treasury Yield At Highest In 3 Months As Dudley Reinforces Fed Plan, Stocks Rise
June 19 2017 - 4:13PM
Dow Jones News
By Mark DeCambre, MarketWatch
Questions about sluggish inflation had been putting pressure on
Treasury yields
U.S. Treasury yields climbed on Monday, with the two-year note
hitting its highest level since March, as so-called risk assets
drew bidders and one Fed official emphasized the central bank's
plan to normalize monetary policy--factors that should
theoretically push yields higher.
The two-year note yield gained 4.5 basis points at 1.364%,
representing its highest yield since March 14, and logging its
biggest one-day climb since April 24, according to WSJ Market Data
Group data.
Yields rise as bond prices fall.
The yield on the 10-year Treasury note gained 3.1. basis points
at 2.188%, while the yield on the 30-year Treasury bond , known as
the long bond, ticked up 0.5 basis point to 2.787%.
The yield rise accelerated after New York Federal Reserve
President William Dudley
(http://www.marketwatch.com/story/feds-dudley-says-hes-not-paying-attention-to-bond-markets-signals-of-concerns-2017-06-19)
described overall economy as "pretty good" while speaking at a
business roundtable discussion in Plattsburgh, N.Y. He said the
U.S. central bank wasn't taking cues from sluggish yields in the
bond market, which should climb as the Fed tightens monetary
policy. Last Wednesday, the Fed raised interest rates to a range
between 1% and 1.25%, while laying out the groundwork for unwinding
its $4.5 trillion balance sheet.
Bond traders have been fixed on a flattening yield curve, a line
that traces yields across maturities, which has persisted despite
the rate-hike cycle and implies that bond-market investors share a
dimmer outlook for the U.S. economy than the Fed. Flattening yield
curves tend to be looked at as a precursor to a slowing
economy.
Dudley said the Fed has to keep raising interest rates to avoid
being caught flat-footed and being forced to raise interest rates
too quickly, which could risk causing a recession.
Donald Ellenberger, senior portfolio manager and head of
multisector strategies at Federated Investors, said Dudley's
comments were a "a little on the hawkish side" and were enough to
lift yields higher. Ellenberger also said a number of big deals
were drawing focus away from Treasury buying, including the
expected sale of Argentina's 8.25%, 100-year bonds, according to a
Wall Street Journal article
(https://www.wsj.com/articles/argentina-to-sell-its-first-100-year-bonds-1497882417).
Lingering questions about sluggish inflation, which can erode a
bond's fixed payments, had helped to put downward pressure on
yields despite the hawkish monetary-policy stance maintained by the
Federal Open Market Committee and Fed Chairwoman Janet Yellen, who
described recent signs of weak inflation and economic growth as
"one-off."
"The FOMC statement and Janet Yellen's press conference conveyed
a tone of discounting the recent bad inflation numbers and also
talked about reducing the balance sheet $300 [billion] in the first
year," wrote David Shiau, Treasury trader at Jeffries LLC, in a
note.
Shiau said the much more aggressive pace of balance-sheet
reductions by the Fed might not be received well by the market,
given recent trade that shows investors are betting on a weaker
economic environment.
"The issue of normalization of the composition of the balance
sheet also remains very vague and has not been addressed with any
specificity by Fed officials," he wrote.
Meanwhile, the Dow Jones Industrial Average and the S&P 500
index traded at fresh records on Monday, powered by a rebound in
the technology sector. Appetite for stocks can undercut buying in
Treasurys.
In Europe, the German 10-year Treasury note , known as the bund,
was at 0.29%. Lower yields throughout Europe, compared with their
U.S. counterpart, also has helped to stoke appetite for U.S.
sovereign paper, pressuring yields.
(END) Dow Jones Newswires
June 19, 2017 15:58 ET (19:58 GMT)
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