BOND REPORT: Treasury Yields Slip As Traders Brace For Fed Meeting
September 19 2017 - 9:59AM
Dow Jones News
By Mark DeCambre, MarketWatch , Sunny Oh
Fed gathering is slated to commence later Tuesday
U.S. Treasury yields ticked slightly lower on Tuesday ahead of
an important policy-setting gathering of the Federal Reserve that
is expected to kick off later in the morning, which could determine
the outlook for government paper for the rest of 2018.
The benchmark 10-year Treasury yield was at 2.219%, compared
with 2.230%, while the 30-year bond yield slipped to 2.792%, versus
2.804% late Monday in New York.
However, the 2-year note yield , the most sensitive to Fed
moves, was at 1.381%, little changed compared with 1.384% in the
previous session.
Bond prices and yields move inversely.
The policy-setting Federal Open Market Committee is widely
expected to announce the beginning an unwind of its $4.5 trillion
portfolio of government securities when it releases its policy
update.
In a Goldman Sachs note dated Sept. 15 led by David Kostin,
chief U.S. strategist, the bank said it expected the Fed to say its
balance sheet-normalization would begin in October.
Although rates are forecast to stay on hold, the asset-portfolio
reduction and any signal from the central bank about recalcitrant
levels of inflation will be closely watched, with the move likely
rippling through other assets as yields tick higher.
Check out: Fed's balance-sheet unwind will be moment of truth
for financial markets
(http://www.marketwatch.com/story/feds-balance-sheet-unwind-will-be-moment-of-truth-for-financial-markets-2017-09-18)
See:Why the bond market isn't freaking out from the Fed's shift
to quantitative tightening
(http://www.marketwatch.com/story/why-the-bond-market-isnt-freaking-out-from-the-feds-shift-to-quantitative-tightening-2017-09-14)
The effect of the central bank's unprecedented asset unwind
isn't known. But some strategists are offering projections.
"We expect the announcement next week of Fed balance sheet
normalization, to begin in October, will lift 10-year Treasury
yields via the term premium and put modest downward pressure on
equity valuations. Bank stocks, which no longer carry their
postelection policy premium, are poised to profit from higher
yields and a steeper curve," Goldman wrote on Friday.
Read:Fed to take historic leap into the unknown
(http://www.marketwatch.com/story/fed-to-take-historic-leap-into-the-unknown-2017-09-14)
"Term premium" refers to a differential between bonds with
shorter maturities relative to those with longer maturities.
Recently the premium between 2-year and 10-year notes has narrowed,
which can imply a bearish outlook on the economy.
Goldman is expecting for the 10-year yield to climb in absolute
terms but also relative to its short-dated counterpart, steepening
the so-called yield curve, which should be beneficial to banks that
borrow short-term and extend loans on a longer-term basis.
Meanwhile, higher yields might lure some investors away from assets
perceived as risky like stocks, to find richer yields, with the Dow
Jones Industrial Average and the S&P 500 index on Monday being
pushed to all-time highs
(http://www.marketwatch.com/story/dow-sp-500-line-up-for-fresh-records-to-start-the-week-2017-09-18).
The reduction of the Fed's balance sheet, accumulated during the
heart of the 2007-'09 financial crisis, also is expected to have a
tightening effect on rates, pushing them higher along with the
central bank's rate-hike efforts. Wall Street is pricing in a
nearly 60% chance of a rate increase before the end of 2017, up
from around 37% about a month ago, according to CME Group data
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
So as to mute the impact the Fed is expected to take baby steps
in the unwind. The current plan calls for the balance sheet to
initially shrink by only $10 billion a month. The pace of the
rundown would then increase by $10 billion every quarter, up to a
maximum of $50 billion a month.
Ahead of the policy announcement due Wednesday, a report on
construction on new houses in August showed a decline of 0.8% to an
annual rate of 1.18 million
(http://www.marketwatch.com/story/housing-starts-dip-in-august-but-permits-surge-in-sign-of-optimism-2017-09-19),
but a jump in new permits of 5.7% suggest the dip would be
temporary. The government said the data wasn'tt muddied by
Hurricane Harvey, which inundated swaths of the Houston and
Louisiana area.
Meanwhile, import prices climbed 0.6% in August
(http://www.marketwatch.com/story/cost-of-imported-goods-surge-in-august-led-by-fuel-2017-09-19),
but have only showed gains of 2.1% for the next 12 months,
suggesting the U.S. isn't importing much inflation despite the
weaker dollar. Since the beginning of the year, the U.S. currency
has strengthened more than 10% against its peers. The ICE Dollar
index, a gauge of the dollar's strength against six major
counterparts, depreciated 0.2%.
(END) Dow Jones Newswires
September 19, 2017 09:44 ET (13:44 GMT)
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