BOND REPORT: Treasury Yields Climb As Fed's Dudley Reinforces Rate-hike Plan, Stocks Rise
20 June 2017 - 4:15AM
Dow Jones News
By Mark DeCambre, MarketWatch
2-year Treasury note jumps 4.1 basis points to 1.360%
U.S. Treasury yields climbed on Monday 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 yield on the 10-year Treasury note was up 2.7 basis points
at 2.184%, compared with 2.157% late Friday in New York. The
two-year note yield gained 4.1 basis points at 1.360%, while the
yield on the 30-year Treasury bond , known as the long bond, ticked
up 0.4 basis point to 2.786%, compared with 2.782% on Friday.
Yields rise as bond prices fall.
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," 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 on Monday. Ellenberger also said a number of big
deals were drawing focus away from Treasury buying, including the
expected sale of Argentina's 100-year bonds, set to be priced to
yield 8.25%, 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 touched 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 14:00 ET (18:00 GMT)
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