BOND REPORT: Treasury Yields Struggle For Direction In Volatile Week
August 18 2017 - 5:26PM
Dow Jones News
By Sunny Oh
President Donald Trump removes Steve Bannon from position as
White House chief strategist
U.S. Treasury markets ended the week nearly where they started
in a volatile week of trade that included political turmoil in
President Donald Trump's administration, diverging economic data,
dovish Fed minutes and a terrorist attack in Spain.
Friday's trade epitomized that turbulence as reports that Trump
forced out Steve Bannon as White House chief strategist, sparked
some Friday trading before activity moderated.
The 2-year government bond's yield rose by less than a basis
points on Friday to 1.314%, contributing to a weekly gain of 2
basis points, the largest increase in six weeks. Bond prices move
inversely to yields.
The 10-year benchmark Treasury yield was mostly unchanged for
both Friday and the week at 2.196%. While, the 30-year Treasury
bond's yield was flat on the day at 2.779%, but nonetheless posted
a five-day drop of 1.1 basis point.
Yields rebounded from their intraday lows on Friday after
reports surfaced that Trump had removed Bannon, with bond traders
divided about whether the news would stabilize the turmoil-ridden
administration after Trump stoked a fervor due to his reaction to
violence tied to a white-supremacist rally in Virginia.
Rocky bond markets this week were driven by sharp swings in
political uncertainty as a standoff between North Korea and
President Donald Trump's administration abated only to give way to
the dissolution of Trump's business advisory councils. Support for
Trump among his own party has ebbed as several Republican senators
and congressmen have condemned the president 's Charlottesville
response.
"Enough key players in Congress are stepping away from the
shadow cast by the Trump presidency that financial markets are
marking down prospects of this president being able to achieve any
constructive objectives for tax reform, infrastructure spending or
health care reform," said Carl Weinberg, chief economist for High
Frequency Economics, in a note to clients.
A controversial figure in Trump's inner circle, Bannon's
departure may placate some because he was viewed as a key
influencer of Trump's more radical views.
"There might be relief that the more fractious elements of the
White house is contained. To the extent that this might look like a
more Republican administration, this could soothe a lot of nerves,"
said Aaron Kohli, fixed-income strategist for BMO Capital
Markets.
Moreover, his departure could lend strength those in his
administration who favor free trade and a more globalized economy,
instead of the protectionist policies that economists fear will
tamp down growth prospects. This could help avert a possible trade
war after a flare-up in tensions between China and the U.S. when
Trump authorized an inquiry into unfair trade practices including
the theft of intellectual property.
"[Bannon] favors confrontation with China, he is economically
nationalistic. Whether you agree with that or not, replacing him
will probably lead to less conflict against trading partners," said
Kohli.
On Friday, data showed U.S. consumer-sentiment index rising to
its highest level since January. The University of Michigan
consumer-sentiment survey rose to 97.6 in August from 93.4 in July
(http://www.marketwatch.com/story/americans-more-gung-ho-about-economy-in-august-consumer-sentiment-survey-shows-2017-08-18)and
comes on the heels of retail sales that notched a 7-month high
(http://www.marketwatch.com/story/us-retail-sales-soar-in-july-to-7-month-high-2017-08-15).
The 2-year Treasury yield ended broadly higher this week even
after the Fed issued a set of minutes that were largely interpreted
as dovish by market participants. The minutes from the Federal
Reserve's July policy meeting showed central bankers were finally
beginning to concede that the weakness in inflation might not be
transitory, suggesting a more gradual pace of monetary tightening.
Consumer prices have remained soft for five straight months since
March
(http://www.marketwatch.com/story/us-consumer-inflation-remains-soft-in-july-cpi-shows-2017-08-11).
On Thursday, a terrorist attack in Barcelona led to a flight to
European government paper which spilled over into Friday, with
assets perceived as safe attracting a rush of flows from investors
fleeing equities. The German 10-year government bond's yield fell
1.2 basis point to 0.413%, as the Stoxx Europe 600 index fell 0.7%
to 3041.7.
Next week, market participants will gear up for the Federal
Reserve symposium in Jackson Hole, Wyo. Both Fed Chairwoman Janet
Yellen and European Central Bank President Mario Draghi are
expected to attend the get-together. But sources at the ECB have
said Draghi wouldn't announce a major policy shift as previous
rumors had suggested, even as the eurozone's economy makes a broad,
steady recovery
(http://www.marketwatch.com/story/eurozone-recovery-aided-by-dutch-surge-2017-08-16).
(END) Dow Jones Newswires
August 18, 2017 17:11 ET (21:11 GMT)
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