By William Watts, MarketWatch

Markets behaving 'like they've eaten too much cake'

Treasurys weakened Thursday, allowing yields to rise ahead of an eagerly awaited Friday speech by Federal Reserve Chairwoman Janet Yellen.

The yield on the 10-year Treasury note rose 1.9 basis points to 1.576%, according to Tradeweb. Yields rise as debt prices decline; a basis point is a hundredth of a percentage point.

Yields initially extended their rise after data showed a stronger-than-expected rebound (http://www.marketwatch.com/story/us-durable-goods-orders-jump-44-in-july-2016-08-25) in orders for durable goods in July and a dip in first-time applications (http://www.marketwatch.com/story/jobless-claims-dip-to-261000-layoffs-still-scarce-2016-08-25) for unemployment benefits.

Traders have stayed on the sidelines ahead of Yellen's speech at the Kansas City Fed's annual symposium in Jackson Hole, Wyo., which will be closely followed for clues to the timing of the central bank's next rate increase. Analysts said the Thursday data was unlikely to change the calculus.

Read:Fed might hike interest rates despite market objections (http://www.marketwatch.com/story/fed-going-out-to-jackson-hole-to-get-divorce-from-markets-2016-08-23)

"We do not think these will change the backdrop of weak U.S. economic growth that has been in place since at least 4Q15," said Rob Carnell, chief international economist at ING Bank.

"Against this backdrop, Janet Yellen will struggle to make a strong case for imminent further tightening at her Jackson Hole speech later on Friday--though no doubt she will try to maintain an optimistic view, and keep further tightening options open," he said.

A hawkish tone from Yellen would boost bets on a rate rise, potentially pushing up yields at the short end of the curve.

Yellen will find it difficult to ignore improving underlying economic conditions but may also emphasize longer-run policy considerations, said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie.

"If Janet Yellen sounds 'hawkish' at her Jackson Hole speech on Friday, it will be in regard to the cumulative progress made by the U.S. economy and the prospect that, as a result, policy rates will rise, presumably soon," he said in a note. "Of course, Yellen could combine this 'short-term' hawkishness with a discussion of the 'long run' and concede that because the 'natural real rate of interest' (or R*) is low, rates will not rise that much in the current cycle."

As investors have moved to the sidelines, it's made for remarkably quiet trading in both bonds and equities.

"Markets continue to behave like they've eaten too much cake and need to lie in the corner and do nothing in order to recover. Inactivity rules," said Jim Reid, macro strategist at Deutsche Bank, in a note.

Reid noted that the monthly 10-year Treasury range is its narrowest in a decade (see chart below):

See:The Treasury market hasn't been this quiet in a decade (http://www.marketwatch.com/story/the-treasury-market-hasnt-been-this-quiet-in-a-decade-2016-08-24)

(http://www.marketwatch.com/story/the-treasury-market-hasnt-been-this-quiet-in-a-decade-2016-08-24)Kansas City Fed President Esther George on Thursday, in a pair of interviews, said she thought it was time to raise interest rates (http://www.marketwatch.com/story/feds-george-says-its-time-for-raising-interest-rates-2016-08-25) (http://www.marketwatch.com/story/feds-george-says-its-time-for-raising-interest-rates-2016-08-25). George, who is a voting member this year of the rate-setting Federal Open Market Committee, cast the lone dissenting vote in favor of a rate rise at the Fed's July meeting.

Dallas Fed President Robert Kaplan told CNBC that the case for a rate increase was building, but offered no timetable for a move. Kaplan isn't a voting member of the FOMC this year.

Yields saw renewed upward pressure after a relatively weak auction of $28 billion in new 7-year notes .

The yield on the 2-year Treasury note rose 2 basis points to 0.786%, while the 30-year Treasury bond yield rose 2.6 basis points to 2.269%.

 

(END) Dow Jones Newswires

August 25, 2016 16:03 ET (20:03 GMT)

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