BOND REPORT: 2-year Treasury Yield Hovers Near 9-year Peak As Wall Street Braces For Higher Rates
15 November 2017 - 4:13AM
Dow Jones News
By Mark DeCambre, MarketWatch
Traders in the fed futures market are pricing close to a 90%
chance of another quarter percentage point rate increase in
December
Long-dated Treasury yields fell on Tuesday, with short-dated
yields holding near a nine-year high, suggesting that the outlook
for a rate increase in coming weeks from the Federal Reserve has
firmed for investors.
Traders also listened to comments from prominent central
bankers, including Fed Chairwoman Janet Yellen, European Central
Bank President Mario Draghi, Bank of Japan Gov. Haruhiko Kuroda and
Bank of England Gov. Mark Carney, who all spoke at a panel
discussion in Frankfurt.
What are yields doing?
The 2-year Treasury note yield was at 1.691%, virtually
unchanged from its level late Monday in New York
(http://www.marketwatch.com/story/treasurys-see-buying-as-brexit-concerns-stoke-demand-for-safe-assets-2017-11-13).
The 10-year benchmark Treasury note yield was at 2.387%, versus
2.400% in the previous session, while the 30-year Treasury yield
slipped 2.6 basis points to 2.843%, falling slightly compared with
2.869%.
Bond prices and yields move in opposition.
What's driving Treasurys?
Wall Street is pricing in a near-certain chance of an
interest-rate increase when the Federal Open Market Committee next
convenes at Dec. 12-13, according to CME Group data
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
Those expectations have lifted short-term interest rates--the
most sensitive to shifting interest-rate expectations--to their
highest level in nearly a decade. However, sluggish levels of
inflation and wage growth have weighed on longer-dated Treasurys,
more influenced by the inflation outlook because rising prices can
chip away at a bonds fixed value.
That has helped flatten the so-called yield curve, which
outlines the relationship between a bond's maturities and its
yields. When long-dated yields fall, and short-dated yields rise,
the narrowing gap gives the curve a more flattened shape.
Investors also have been following developments in Washington
tied to tax policy, with bond investors concerned that current
proposals might increase the deficit and influence bond
issuance.
Outgoing Fed boss Yellen said valuations for stocks are near
historic highs, attributing elevated levels for stocks to the
ultralow rate environment, speaking in Frankfurt. President Donald
Trump nominated Fed. Gov. Jerome Powell to replace Yellen when her
term as Fed chief expires in February.
Meanwhile, Mohamed El-Erian is being considered for the No. 2
job at the Federal Reserve, according to a report by The Wall
Street Journal
(https://www.wsj.com/articles/white-house-considering-nomination-of-mohamed-el-erian-for-federal-reservevice-chair-1510676461).
El-Erian, the chief economic adviser at Allianz Global
Advisers.
See: Fed's Yellen: It's confusing with so many voices on the
FOMC
(http://www.marketwatch.com/story/feds-yellen-its-confusing-with-so-many-voices-on-the-fomc-2017-11-14)
What are strategists saying?
"Yields across the board were higher [after the wholesale
inflation report]. With that, you started to see these flattening
trades are taking place, buying the long end, and selling the
middle of the curve. You've seen the curve flatten again. The theme
here is for the curve to continue to flatten, mainly because we're
going to see a number or rate hikes in 2018," said Tom di Galoma,
managing director of Treasurys trading at Seaport Global
Securities.
What else is on investor's radar?
October wholesale prices rose 0.4%
(http://www.marketwatch.com/story/us-producer-prices-surge-04-in-october-2017-11-14),
higher than the 0.1% rise for the month forecast by economists
polled by MarketWatch. But analysts warned that consumer prices and
producer prices weren't closely correlated, leaving an element of
uncertainty in Wednesday's CPI number. Wall Street traders have
been keenly waiting for further clues on the prospects for
inflation normalizing closer to an annual rate around 2% that most
central banks deem appropriate for a healthy economy.
Investors are also watching a parade of Fed speakers this week,
highlighted by Yellen, as well as Raphael Bostic, the new president
of the Atlanta Fed. San Francisco Fed President Jim Bullard, a
nonvoting member, said there was no need to lift interest rates
(http://www.marketwatch.com/story/bullard-says-no-need-to-lift-interest-rates-2017-11-14).
While, Dallas Fed President Robert Kaplan, voting member, said he
was "actively considering" his support for another rate increase in
December.
European growth showed no signs of letting up after the German
economy grew at an annualized 3.3% in the third-quarter
(http://www.marketwatch.com/story/german-gdp-grows-33-outstripping-forecasts-2017-11-14).
The yield of the 10-year German bond was at at 0.395%, compared
with 0.413% late Monday in New York.
Read: Here are the seven Fed speeches that matter this week
(http://www.marketwatch.com/story/here-are-the-seven-fed-speeches-that-matter-this-week-2017-11-13)
(END) Dow Jones Newswires
November 14, 2017 11:58 ET (16:58 GMT)
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