By Min Zeng
Treasury bonds pulled back on Wednesday for a second straight
session as the latest inflation report spurred investors to take
some chips off the table.
In late-afternoon trading, the benchmark 10-year note was 8/32
lower, yielding 2.234%. Yields rise as prices fall.
The yield remains sharply below 3% at the start of the year.
The consumer price index for September rose by 0.1% after a
decline of 0.2% a month earlier. The modest rise matched economists
forecast, but it soothed concerns that inflation could continue to
fall to alarmingly low levels amid uneven global growth and falling
commodities prices.
A weaker inflation report might have bolstered the case for the
Federal Reserve to delay ending its monthly bond buying program
from next week's policy meeting. The Fed's bond purchases have been
a main factor keeping bond yields near historic lows.
"It is likely we see the Fed end its bond buying" next week,
which generated some profit-taking in the bond market, said Larry
Milstein, head of government and agency trading at R.W. Pressprich
& Co. in New York.
Traders said another factor sending bond yields higher was
planned sale of new bonds from Verizon Communications Inc.
(VZ).
Ahead of selling new bonds, companies typically sell Treasury
bonds as a hedge to neutralize unwanted interest fluctuation. Some
investors also sold Treasury bonds to buy corporate bonds which
offer higher yields compared to U.S. government debt.
Contained inflation would continue to give the Fed some
breathing room in raising interest rates even if they stops buying
bonds, which would continue to keep a lid on bond yields, according
to some investors and traders.
The annual rate of September's CPI was 1.7%, staying below the
Fed's 2% target rate. Some market-based inflation expectations have
also slipped under the Fed's target over the past few weeks.
Eurozone's struggling economy and alarmingly low inflation has
been a main focus of global investors this month, which sparked
broad selloff in European and U.S. stocks last week and fueled
strong demand for ultrasafe U.S. government bonds. At one point
last week, the 10-year Treasury note's yield fell to 1.87%, the
lowest level since May 2013.
Over the past few sessions, financial markets have shown signs
of stabilization from last week's turmoil. Some traders said
uncertainty over the global economy may continue to generate price
swings in financial markets and keep Treasury yields at low
levels.
"Equities have been able to retrace a little less than two
thirds of the sell off that began in mid-September in the past five
days, which is removing some of the flight to quality bid we saw
last week" in Treasury bonds, said Arthur Bass, managing director
and interest rate strategist at Newedge USA LLC in New York. "It is
still uncertain whether this will be a longer term trend, but for
the moment things have stabilized."
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/2% 2-year 100 7/32 dn 1/32 0.378% +2.4BP
7/8% 3-year 100 7/32 dn 3/32 0.795% +3.2BP
1 5/8% 5-year 101 14/32 dn 6/32 1.447% +3.7BP
2% 7-year 101 15/32 dn 7/32 1.898% +3.6BP
2 3/8% 10-year 101 8/32 dn 8/32 2.234% +2.8BP
3 1/8% 30-year 102 10/32 dn 14/32 3.007% +2.2BP
2-10-Yr Yield Spread: +185.6BPS Vs +184.7BPS
Source: Tradeweb/WSJ Market Data Group
Write to Min Zeng at min.zeng@wsj.com