BOND REPORT: Yield Curve Ends Week Flattest In A Decade
November 20 2017 - 9:50AM
Dow Jones News
By Sunny Oh
The spread between the 2-year yield and the 10-year yield fell
to 0.62 percentage point, a decade low
Long-dated Treasury yields fell while short-dated yields rose
Friday as investors added to bets that the Federal Reserve will
raise rates more than the market has so far anticipated next
year.
The day's action encapsulated the weekly trading which saw the
spread between the 2-year note yield and the 10-year note yield
reach a decade low.
What are yields doing?
The 10-year Treasury note yield fell a basis point to 2.352%,
and slipped 4.4 basis points this week. Meanwhile, the 30-year bond
yield fell 1.4 basis point, contributing to an 8.6 basis point
decline in the five-day period.
Short-dated yields continued their impressive ascent. The 2-year
note yield rose 1.7 basis points to 1.729%, a 10-year high. That
contributed to a 7.1 basis points jump over this week, the biggest
weekly climb since Oct. 20.
Bond prices move in the opposite direction of yields
What's driving the market?
The yield curve, a line tracing yields across maturities, has
flattened as traders bought long-dated securities and sold
short-dated securities on the belief that the Federal Reserve would
raise rates more than investors thought. The spread between the
2-year note and the 10-year note, one gauge of the yield curve's
slope, fell to 0.62 percentage point, the lowest since Sep.
2007.
As growth gathers momentum, investors are concerned the central
bank will deliver the three to four interest rates even though the
inflation backdrop remains lackluster.
Part of the curve's flattening move has been helped by the U.S.
economy notching a spree of solid economic readings this week.
Industrial production notched a stellar 0.9% rise in October
(http://www.marketwatch.com/story/industrial-production-surges-in-october-tops-forecast-2017-11-16),
suggesting manufacturers were picking up steam. Friday's housing
starts number could help add to this bullish undertone and
strengthen the Federal Reserve's case for raising interest rates in
December. That could give the 2-year yield impetus to travel
higher.
Most investors were still keeping a steady eye on the tax bill,
seen as at least a partial driver of the stock's market's gains and
some of the bond market's losses. The House passed their version of
the bill on Thursday. Treasurys, however, have remained resilient
to the slow progress of the Republican plan to overhaul the U.S.
tax code as market participants still held doubts about the
Senate's ability to pass a comprehensive tax bill.
See: Republican Ron Johnson opposes current Senate tax bill
(http://www.marketwatch.com/story/republican-ron-johnson-opposes-current-senate-tax-bill-2017-11-15)
Read: Corker worries over true cost of 'temporary' cuts in tax
bill
(http://www.marketwatch.com/story/corker-worries-over-true-cost-of-temporary-cuts-in-tax-bill-analyst-sees-democratic-wave-in-polls-2017-11-17)
What are analysts saying?
"Investors are finally getting it, inflation is likely to stay
benign," said Jason Thomas, Chief Economist at AssetMark. That has
made owning longer-maturity debt attractive even as rates ratchet
up higher. The combination of the two factors has been responsible
for flattening the yield curve, said Thomas.
"The bigger test, of course, will come in the Senate, but that
chamber's vote is now not likely to take place until after next
week, thus giving the Finance Committee much more time to try to
address various concerns about the bill," said Thierry Wizman,
global interest rates and currencies strategist for the Macquarie
Group.
What's on investor's radar?
Housing starts jumped 13.7% in October
(http://www.marketwatch.com/(S(rnrsydaynixa5x55oiibxm45))/story/housing-starts-booms-137-in-october-2017-11-17),
or an annual rate of 1.29 million, the fastest pace in a year.
Economists surveyed by MarketWatch expect it to climb to 1.2
million from a September reading of 1.127 million, which was later
revised up to 1.135 million.
(END) Dow Jones Newswires
November 20, 2017 09:35 ET (14:35 GMT)
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