BOND REPORT: U.S. Government Bond Yields Rise As Fed's Powell Reaffirms Need For Gradual Hikes
21 June 2018 - 2:45AM
Dow Jones News
By Mark DeCambre, MarketWatch , Sunny Oh
Treasury prices fell Wednesday, pushing up yields, after Federal
Reserve Chairman Jerome Powell reasserted the need for gradual rate
increases, citing a tight labor market.
This comes a day after an escalation in the tit-for-tat trade
skirmish between China and the U.S. drove investors to flee to the
perceived safety of government paper. Risky assets across the globe
signaled that tariff-spooked markets were reassessing the threat of
a trade-war materializing between the world's largest
economies.
What are Treasurys doing?
The 10-year Treasury note yield advanced 2 basis points to
2.913%. The 30-year bond yield rose 1.6 basis point to 3.044%. The
two-year note yield edged 1.3 basis points higher to 2.558%.
Bond prices move in the opposite direction of yields.
What's driving markets?
Federal Reserve Chairman Jerome Powell reiterated that the
central bank needed to gradually hike rates. He also said inflation
expectations were well anchored, suggesting investors did not see
an inflation flare-up nor question the central bank's commitment to
keeping inflation controlled, in an appearance on a panel at the
annual European Central Bank Forum on Central Banking in Sintra,
Portugal. Rising rates tend to be bearish for bonds by sapping the
value of their fixed-interest payments.
See: Fed's Powell says U.S. economy not on verge of repeating
1970s inflation
(http://www.marketwatch.com/story/powell-says-us-economy-not-on-verge-of-repeating-the-inflation-of-the-1970s-2018-06-20)
The event comes after the Fed lifted benchmark rates last week
by a quarter of a percentage point and its projections for future
hikes indicated that policy makers see two additional rate
increases in 2018 as appropriate
(http://www.marketwatch.com/story/fed-hikes-interest-rates-now-sees-4-moves-this-year-2018-06-13).
Meanwhile, the ECB last week outlined its plans to end its
crisis-era, easy-money policies
(http://www.marketwatch.com/story/ecb-aims-to-end-bond-buying-program-by-end-of-2018-2018-06-14)
but indicated it wouldn't move to raise interest rates until at
least next summer.
Read:The most recent Fed interest-rate projections known as the
dot plot
(https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180613.pdf)
The S&P 500 index looked set to recoup some of the losses
driven by President Donald Trump's called request from his
administration for a list of $200 billion in Chinese goods to
implement a fresh round of tariffs, after he approved levies on $50
billion of goods last week, raising the stakes in a back-and-forth
dispute between Beijing and Washington that investors fear risks
spilling over into the global economy if it morphs into a genuine
trade war.
The modest recovery in risk assets not just in the U.S. but in
the rest of the world alleviated the demand for haven investment
likes U.S. government paper.
Meanwhile, the European Union announced on Wednesday that it
would implement tariffs
(http://www.marketwatch.com/story/eu-to-impose-tariffs-on-32-billion-of-us-goods-starting-friday-2018-06-20)on
EUR2.8 billion ($3.2 billion) worth of goods imported from the U.S.
on Friday, in response to the U.S. imposing respective tariffs of
25% and 10% on aluminum and steel imports from the EU on June
1.
Treasurys have also struggled to rally as corporations sell
their debt. Underwriters of the bond issue will sell U.S.
government paper to lock in the borrowing cost of the bond issue.
After the corporate debt hits the market, the underwriter will buy
the Treasurys back. Bayer(BAYN.XE) sold $15 billion of debt on
Monday to finance its recent acquisition of Monsanto.
What did market participants say?
"The Treasury market is caught between the dichotomy of heavy
corporate bond supply and Washington imposing new trade tariffs on
China. Credit supply is causing rates to rise while trade tariffs
are causing a safety bid. Central bankers out of Sintra, Portugal,
are overall upbeat with Chairman Powell signaling that the U.S.
economy is poised for a strong case for gradual rate hikes," said
Tom di Galoma, managing director of government trading at Seaport
Global Securities.
What data was on investors' radar?
Existing home sales in May ran at an annual pace of 5.43 million
(http://www.marketwatch.com/story/existing-home-sales-sink-as-tight-supply-smothers-market-2018-06-20),
from 5.45 million in April.
How are other assets doing?
In other assets, European stocks bounced off a nearly three-week
low
(http://www.marketwatch.com/story/european-stocks-stage-recovery-but-us-china-trade-tensions-remain-2018-06-20),
while Asian stocks also saw broad gains
(http://www.marketwatch.com/story/asian-markets-struggle-to-recover-from-tuesdays-big-losses-2018-06-19),
though the Shanghai Composite Index lagged behind with just a 0.2%
rise.
(END) Dow Jones Newswires
June 20, 2018 12:30 ET (16:30 GMT)
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