BOND REPORT: Treasury Yields Pare Gains As Fed Policy Meeting Gets Underway
December 12 2017 - 4:52PM
Dow Jones News
By Sunny Oh
Anticipated Fed rate hike on the radar for Wednesday
Treasury prices pared declines, allowing yields to stabilize,
after strong appetite for an auction of long-dated debt. Meanwhile,
the Federal Reserve has kicked off its closely watched two-day
policy meeting, with a decision on interest rates expected
Wednesday.
What are Treasurys doings?
The 2-year note yield was flat at 1.829%. The 10-year note yield
rose 1.6 basis point to 2.403%. The 30-year bond yield was up a
basis point to 2.782%.
Bond prices move inversely to yields.
What's driving markets?
A strong auction for 30-year bonds helped pare the decline in
prices. Sales of government paper can influence trading by
introducing competing debt into the market, but a healthy appetite
for the debt typically bodes well for secondary-trading prices,
too.
Investors are seeing a lull in trading as busy bond buyers
handle a strong rush of supply from corporate and municipal bonds
with issuers looking to get ahead of the tax plan's passage and
remain grandfathered under the old tax rules. That has temporarily
shifted focus away from the market for government paper.
The Federal Open Market Committee, the central bank's
rate-setting group, convened on Tuesday. It is expected to deliver
a third interest-rate hike for the year when that meeting wraps up
Wednesday. That fact and a bevy of other potentially market-moving
news, including consumer-price index data, has captured investor
attention.
See: What bond and currency traders are looking for from
Yellen's Fed decision
(http://www.marketwatch.com/story/what-bond-and-currency-traders-are-looking-for-from-yellens-fed-decision-2017-12-11)
What did market participants say?
"A primary reason for the tight core outlook for (10-year
Treasurys) is the strong acceptance for the remaining supply in
corporates -- already thinning -- and near record-level municipal
bond sales that could be restricted if/when the tax bill passes.
There is no particular reason to rush into Treasurys as they
certainly will provide ample supply in 2018-2019," wrote Jim Vogel,
an interest-rate strategist for FTN Financial.
Read: Municipal bonds see deluge of supply as Republican tax
plan fears build
(http://www.marketwatch.com/story/municipal-bonds-see-deluge-of-supply-as-republican-tax-plan-fears-build-2017-12-04)
(http://www.marketwatch.com/story/municipal-bonds-see-deluge-of-supply-as-republican-tax-plan-fears-build-2017-12-04)Also
check out: Companies rush to sell bonds to get ahead of tax plan,
sparking 'carnage'
(http://www.marketwatch.com/story/companies-rush-to-sell-bonds-to-get-ahead-of-tax-plan-sparking-carnage-2017-11-10)
What else is on investors' radar?
The NFIB small business optimism index climbed to 107.5 in
November
(http://www.marketwatch.com/story/small-business-sentiment-in-november-powers-to-the-second-highest-reading-on-record-2017-12-12),
the second highest reading on record. Budding confidence that
Congress will pass a tax cut has lifted small-business owners, who
are classified as pass-through firms, one of the chief
beneficiaries of the GOP tax plan
(http://www.marketwatch.com/story/how-the-trumps-tax-bill-will-help-businesses-and-lobbyists-2017-11-08).
Wholesale prices rose 0.4% in November, pulling the inflation
gauge up 3.1% over the past 12 months
(http://www.marketwatch.com/story/us-wholesale-inflation-hits-nearly-6-year-high-adds-to-case-for-fed-rate-hike-2017-12-12).
Higher producer prices can lead to building "pipeline" of
inflationary pressures and is one reason forecasters are hopeful
that the recent weakness in inflation will abate. That could
discourage investors from snapping up long-dated Treasurys, whose
value are worn down by higher prices.
How are other assets doing?
U.K. inflation rose at an annual rate of 3.1% in November thanks
to higher air fares. The U.K. 10-year government bond yield was up
by 1.6 basis point to 1.221%.
(END) Dow Jones Newswires
December 12, 2017 16:37 ET (21:37 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.