BOND REPORT: Treasury Yields End Higher As Deutsche Bank Worries Subside

By Ellie Ismailidou, MarketWatch

Yields rose in September for the second month in a row

Treasury yields rose in September for a second-straight month, logging the largest two-month gain since November 2015, on growing market expectations that the Federal Reserve could raise interest rates by the end of the year.

On Friday, yields reversed an early decline to jump by the most in over two weeks, as Wall Street attempted to move past worries about the financial health of Deutsche Bank AG, which has unsettled global markets over the past several days, pushing Treasury yields to a three-week low.

As U.S. stocks staged a rebound from Thursday's sharp losses (http://www.marketwatch.com/story/us-stock-futures-edge-lower-as-fears-over-deutsche-bank-persist-2016-09-30)and oil prices tipped higher, selling pressures mounted in the Treasury market, pushing prices lower and yields, which move in the opposite direction, higher.

On balance, the yield on the benchmark 10-year Treasury note erased an earlier decline to end 4.8 basis point higher at 1.605%. Over the week, the benchmark yield fell by 1 basis point but over the month it gained 3.7 basis points. One basis point is equal to one-hundredth of a percentage point.

The yield on the two-year Treasury note , which is the most sensitive to rate changes, gained 1.8 basis point on Friday to 0.764%. The yield on the 2-year note gained 1 basis point over the week but lost 3 over the month of September.

And the yield on the 30-year Treasury bond , which is the most sensitive to long-term growth and inflation expectations, on Friday added 5.8 basis points to 2.332%. The so-called long bond lost 0.5 basis point over the week but gained 10.2 over the month.

In Europe, the yield on Germany's 10-year bond known as the bund, inched higher by 0.1 basis point to negative 0.118%, according to Tradeweb.

For the past several days, investors. have been trying to gauge whether Deutsche Bank's(DBK.XE)(DBK.XE) financial woes could turn into a systemic problem for financial institutions in Europe and the U.S., potentially forcing the Fed to stand pat on interest rates in its coming meetings.

Read: Deutsche Bank crisis threatens to roil global markets (http://www.marketwatch.com/story/a-crisis-in-european-banks-threatens-to-roil-global-markets-2016-09-28)

(http://www.marketwatch.com/story/a-crisis-in-european-banks-threatens-to-roil-global-markets-2016-09-28)"If there was one reason for the Fed not to move, that would be it. But we're not there yet," said Dan Heckman senior fixed-income strategist at U.S. Bank.

The German bank's U.S.-listed shares (DBK.XE) rebounded from Thursday's sharp selloff on Friday as reports (http://www.marketwatch.com/story/deutsche-bank-us-shares-surge-13-on-speculation-of-lower-doj-settlement-2016-09-30)continued to circulate that the bank may be able to negotiate a less-onerous settlement with the Justice Department than the $14-billion figure being discussed, according to a report from The Wall Street Journal two weeks ago.

A day earlier, a global flight to quality was sparked after a report that some of the lender's largest clients were pulling cash (http://www.marketwatch.com/story/fearful-clients-pull-billions-of-dollars-out-of-deutsche-bank-2016-09-30) and securities or dialing back trading activity through the bank.

Meanwhile, on the U.S. economic front, consumer spending was barely changed (http://www.marketwatch.com/story/consumer-spending-softens-in-august-2016-09-30)in August as lower sales of new cars and trucks offset an increase in services such as education and health care.

And U.S. inflation as measured by the PCE index, the Federal Reserve's preferred inflation barometer, increased 1% in the 12 months ended in August while the annual rate of core inflation, which strips out the volatile food and energy categories, edged up to 1.7%, the Commerce Department said (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm).

Inflation is still running below the 2% target desired by the Federal Reserve, one reason the central bank has held off on raising interest rates. Still, the Fed is expected to boost a key lending rate before the end of the year.

"There is little reason to think core inflation will rise much further in the months ahead, however, which suggests that the Fed will likely hold on until December before raising interest rates," said Steve Murphy, U.S. economist at Capital Economics, in an email after the release.

(END) Dow Jones Newswires

September 30, 2016 16:38 ET (20:38 GMT)

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