BOND REPORT: Treasurys See Buying As Rate Hike Fears Recede From Monetary Policy Report
February 23 2018 - 3:21PM
Dow Jones News
By Sunny Oh
The Italian election will be held on March. 4
Treasury prices rose, pulling yields lower, on Friday after the
Federal Reserve, in a report to Congress, gave little indication it
plans to raise interest rates more aggressively in 2018.
What are bonds doing?
The 10-year Treasury note yield slipped 5.1 basis points to
2.866%, retracing the weeklong climb that saw the yield hit a
four-year high of 2.957%, according to Tradeweb data.
The 2-year note yield was down 2.8 basis points to 2.226%. The
30-year bond rate fell 4.6 basis points to 3.160%.
Bond prices move in the opposite direction of yields.
What's driving markets?
Federal Reserve Chairman Jerome Powell is set to deliver
semiannual testimony before the House Financial Services Committee
on Tuesday. In its report, the Fed did not appear to be in favor of
pressing the pedal beyond the three rate increases expected in
2018. That helped to extend the bond market's rally by tamping down
on fears that the central bank would go in overdrive in response to
resurgent inflation.
Read: Fed on track for 3 rate hikes in 2018, but 4? No sign in
report to Congress
(http://www.marketwatch.com/story/fed-on-track-for-3-rate-hikes-in-2018-but-4-no-sign-in-report-to-congress-2018-02-23)
Yields initially fell after traders looked ahead to the Italian
election on March. 4 where the chance of a populist euroskeptic
party being elected to government caused Italian bonds to come
under pressure and bonds of other eurozone economies to surge. In
particular, German bonds, or bunds, received a lift thanks to its
role as the traditional haven asset in European markets.
Treasurys tend to follow bunds as they share similar
characteristics and are both seen as high-quality and liquid
assets.
Analysts and the latest polls indicate the most likely result
from the election is a hung parliament. The potential for political
deadlock threatens the prospect of economic reforms needed to
resuscitate Italian growth and a banking system weighed down by bad
debts. Italy's government debt as a percentage of GDP stands above
130%, the second highest levels in the eurozone.
See: Why investors are counting down to the most important date
on Europe's political calendar
(http://www.marketwatch.com/story/investors-are-counting-down-to-the-most-important-date-on-europes-political-calendar-2018-02-20)
(http://www.marketwatch.com/story/investors-are-counting-down-to-the-most-important-date-on-europes-political-calendar-2018-02-20)In
a quiet week for economic data, the 10-year yield made an attempt
to break toward the 3.00% level, a key psychological level, on
Wednesday after the prospects of an aggressive Federal Reserve
coupled with fears over a deluge of fresh issuance sent rates
higher. In addition, the minutes from January's meeting of the
Federal Open Market Committee raised the outlook of inflation to
scare off holders of long-dated debt, the most sensitive to the
corrosive effects of higher prices.
What did analysts' say?
"In the run up to Italian elections next Sunday, Italian debt
has led all credit spreads in Europe wider this week. That includes
a serious reversal of profits in senior bank obligation credit, a
weakness that appeared to have worked itself out in 2017. The
result this morning is a 4 -- 5 basis point decline in higher grade
[European] sovereign yields to levels not seen in four weeks," said
Jim Vogel, interest-rate strategist for FTN Financial.
"The story of higher Treasury yields has in part been driven by
the recent barrage of news related to Treasury supply. Besides the
passage of the $1.5 trillion tax package on December 20 of last
year, there have been a number of other catalysts on the Treasury
supply front that have played a role in moving yields higher," said
analysts at Wells Fargo Securities.
What else is on investors' radar?
New York Fed President William Dudley, Cleveland Fed President
Loretta Mester, Boston Fed President Eric Rosengren spoke during
Chicago Booth School of Business' Fed policy forum. Dudley said he
was open to employing quantitative easing again if interest rates
neared zero. While, Rosengren said it was likely that the use of
asset purchases were needed in the future.
At the same forum, the Fed appeared to receive pushback from
Wall Street. Investment bank economists presented a paper that
suggesting the Fed's bond-buying program wasn't as stimulative as
investors might have thought, and that the central bank's reduction
of its asset purchases would therefore not lift yields as much as
expected.
See: Good news--the Fed's shift to quantitative tightening might
not be as painful as expected
(http://www.marketwatch.com/story/good-news-the-feds-shift-to-quantitative-tightening-might-not-be-as-painful-as-expected-2018-02-23)
Bond investors are concerned that without the backstop of the
central bank, the wave of issuance coming this year may only draw
bond-buyers who may desire a discount, that is, higher yields.
How did other assets' move?
The yield for the 10-year German government bond, or bunds, fell
5.2 basis points to 0.653%. But the 10-year Italian government bond
yield only fell by 0.7 basis point to 2.067%, to pare back the
weeklong climb.
(END) Dow Jones Newswires
February 23, 2018 15:06 ET (20:06 GMT)
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