BOND REPORT: Yield Curve Flattens Further On Growing Expectation For Fed To Raise Rates
December 14 2017 - 5:24PM
Dow Jones News
By Sunny Oh
Long-dated yields fell, while short-dated yields rose, on
Thursday after strong economic data but weak expectations for
future inflation strengthened the likelihood the Federal Reserve
would raise rates more aggressively next year.
What did Treasurys do?
The 10-year Treasury yield ticked higher 0.7 basis point to
2.346%. The 2-year note yield rose 2.4 basis points to 1.811%. The
30-year bond yield added 2.8 basis points to 2.710%.
Bond prices move in the opposite direction of yields.
What's driving markets?
The yield curve, a line tracing a bond's maturities and its
respective yield, flattened after the Fed's rates projections and
economic forecasts on Wednesday
(http://www.marketwatch.com/story/fed-raises-interest-rates-and-makes-few-changes-to-outlook-ahead-of-transition-to-powell-2017-12-13)highlighted
the central bank's willingness to normalize monetary policy
regardless of a lack of inflation. Investors suggested expectations
of further hikes have sped up the curve's flattening as it
demonstrated the Fed was not patient enough for inflation to pick
up before taking action.
Long-dated yields were also capped after European Central Bank
President Mario Draghi repeated his customary dovish remarks,
saying an "ample degree" of stimulus was still needed to boost
inflation. That helped frustrate expectations the central bank
would shift its language from easing to tightening in anticipation
of a conclusive end to its bond purchases in Sept. 2018.
Holders of U.S. government paper watch European interest rates
closely as they tend to move in lockstep with U.S. rates, with some
analysts saying that low European yields have kept a lid on
Treasury rates.
See: 3 takeaways from Draghi's ECB news conference
(http://www.marketwatch.com/story/3-takeaways-from-draghis-ecb-news-conference-2017-12-14)
(http://blogs.marketwatch.com/thetell/2017/12/14/watch-here-for-ecb-hints-to-the-unwinding-of-qe-live-blog/)A
raft of solid economic data helped to lift short-term yields, which
are sensitive to Fed policy. This comes in the wake of a weak
consumer-price index figure on Wednesday that drew bond buying.
Retail sales for November rose 0.8%
(http://www.marketwatch.com/story/us-retail-sales-jump-08-in-november-as-holiday-season-gets-to-good-start-2017-12-14).
(http://blogs.marketwatch.com/thetell/2017/12/14/watch-here-for-ecb-hints-to-the-unwinding-of-qe-live-blog/)What
did strategists say?
"Earlier this year, the Fed signaled an unwillingness to be
deterred by lowflation in its attempt to put a 'gradual removal of
accommodation' plan into practice. This became most evident to the
market at the September FOMC meeting when the preceding series of
disappointing core-inflation reads didn't shift the Fed's dot-plot
or tapering ambitions," wrote Ian Lyngen and Aaron Kohli,
fixed-income strategist at BMO Capital Markets. The dot plot is an
aggregate of the senior Fed officials' estimates of future interest
rates.
What else are on investors' radar?
Initial weekly jobless claims for the 7-day period ending Dec. 9
rose by 11,000 to 225,000
(http://www.marketwatch.com/story/jobless-claims-fall-11000-to-ultra-low-225000-2017-12-14)compared
with an expected 235,000.
What did other assets do?
European bonds took a cue from the U.S. trading action. The
10-year German bond yield was barely changed at 0.310%. The 10-year
French bond yield edged higher a basis point to 0.644%.
(END) Dow Jones Newswires
December 14, 2017 17:09 ET (22:09 GMT)
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