By Sunny Oh
White House announces it will nominate Richard Clarida as vice
chairman of the Fed
Treasury yields retraced their climb Monday after speakers from
the Federal Reserve appeared to open the door to a steeper
rate-hike trajectory, a move that would flatten the so-called yield
curve.
What are Treasurys doing?
The 10-year Treasury note yield rose 0.6 basis points to 2.834%,
after touching an intraday high of 2.865%.
The two-year note yield added 0.9 basis points to 2.377%, the
highest since August 2008, while the 30-year bond yield was mostly
unchanged at 3.031%.
The spread between the two-year note yield and the 10-year note
yield (https://fred.stlouisfed.org/series/T10Y2Y), a widely-watched
measure of the yield curve, narrowed to 45.7 basis points, the
tightest since September 2007. A flattening yield curve is often a
feature of a rising rate environment. A flattening curve can spur
worries about an economic slowdown.
Bond prices move in the opposite direction of yields.
What's driving Treasurys?
With fears fading over U.S. military intervention in Syria,
investors who had sought shelter in Treasurys switched back into
risky assets. The U.S., Britain and France launched missile strikes
in Syria against chemical weapons sites while leaving President
Bashar al-Assad's conventional military facilities intact. That
helped ease concerns the U.S. would escalate tensions with Russia,
which has backed the incumbent Syrian regime.
But President Donald Trump gave investors little time for
respite, accusing Russia and China of currency manipulation in a
tweet Monday
(https://twitter.com/realDonaldTrump/status/985858100149309441),
while also lambasting the Federal Reserve for raising rates. The
strengthening of Treasurys toward the end of the session could have
reflected a return to haven-related buying.
See: Syria brushes off U.S.-led airstrikes, launches new attacks
against rebels
(http://www.marketwatch.com/story/syria-brushes-off-us-led-airstrikes-launches-new-attacks-against-rebels-2018-04-15)
Economic data has also come back on the radar of investors who
are contending with the potential for inflation to hit the Fed's 2%
target range, raising the risk of the central bank leaning toward a
more aggressive hiking trajectory.
This would usually hurt demand for bonds, sending yields higher
across the board. But the danger of a central bank willing to
tighten economic conditions as the boost from fiscal stimulus fades
has helped push down long-dated yields, while lifting short-dated
yields. This has flattened the yield curve, a sign that investors
may be increasingly pessimistic about growth down the road.
New York Fed President William Dudley said Monday
(http://www.marketwatch.com/story/feds-dudley-on-stock-market-valuations-not-unreasonable-2018-04-16)he
was in favor of three to four rate hikes this year, adding that the
central bank could hike at a faster pace if inflation rose above
the 2% target level, while Minneapolis Fed President Neel Kashkari,
a known monetary policy dove, said fiscal stimulus should give the
central bank the headroom it needs to hike rates this year
(http://www.marketwatch.com/story/feds-kashkari-says-fiscal-stimulus-supports-moving-ahead-with-interest-rate-tightening-2018-04-16).
Read: Fed's Kashkari says fiscal stimulus supports moving ahead
with interest-rate tightening
(http://www.marketwatch.com/story/feds-kashkari-says-fiscal-stimulus-supports-moving-ahead-with-interest-rate-tightening-2018-04-16)
What did market participants say?
"The notion that's driving the price action is not just the
geopolitics, which could yet trigger a trade war (or an actual
one), but the relatively strong determination of the Fed to
continue its path of rate increases," said Ian Lyngen and Aaron
Kohli, fixed-income strategists at BMO Capital Markets, in a
note.
"All the fiscal stimulus put into the system will boost the
growth impulse. But if that doesn't lead to a higher investment
rate and productivity growth, we could expect growth to roll over
and lead to what potentially could be a recession, something I
haven't seen discussed as much before," said Matt Toms, chief
investment officer for Voya Investment Management.
What economic data is set to come?
Retail sales jumped 0.6% in March
(http://www.marketwatch.com/story/us-retail-sales-spring-back-06-in-march-after-three-straight-declines-2018-04-16)
after three straight months of declines. Economists polled by
MarketWatch forecast a gain of 0.4% in March, from the 0.1% drop in
the previous month.
The Empire State Index, a survey of manufacturing conditions in
New York state, fell to 15.8 in April, from 22.5 in March, amid
concerns that trade tensions could hurt the U.S.'s growth prospects
(http://www.marketwatch.com/story/empire-state-index-softens-in-april-as-trade-concerns-darken-longer-run-outlook-2018-04-16).
What else is on investors' radar?
Dallas Fed President Robert Kaplan said near-term growth looked
strong
(http://www.marketwatch.com/story/feds-kaplan-says-firms-lack-pricing-power-2018-04-16),
but would moderate in 2019 and 2020.
The White House said it would nominate Richard Clarida
(http://www.marketwatch.com/story/noted-economist-clarida-tapped-by-trump-for-fed-vice-chairmanship-2018-04-16),
an economist at Pimco, as vice chairman of the Fed.
See:Economic Calendar
(http://www.marketwatch.com/Economy-Politics/Calendars/Economic)
(END) Dow Jones Newswires
April 16, 2018 17:04 ET (21:04 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.