By Sunny Oh

Yellen says 'ongoing strength of the economy will warrant gradual increases'

Treasury yields rose on Monday, a day after Federal Reserve Chairwoman Janet Yellen reaffirmed the possibility of another interest-rate increase in 2017. Bond traders also focused on candidates being interviewed to head the U.S. central bank as the process of picking one appeared to be nearly complete.

What did Treasury yields do?

The 2-year note yield , sensitive to shifting expectations for monetary policy, added 5 basis points to 1.542%, marking the biggest one-day gain since Sep. 11.

But action for long-dated government paper was more muted, reflecting trader skepticism of Yellen's belief that inflationary pressures would resurface. The 10-year benchmark Treasury yield rose 3 basis points to 2.309%, while, the 30-year bond ticked up a basis point to 2.823%.

Bond prices and yields move inversely.

What drove markets?

Yellen on Sunday reiterated her support for gradual rate increases and her belief that tightness in labor markets would eventually translate into inflation. Her comments follow a weaker than expected inflation reading on Friday (http://www.marketwatch.com/story/us-inflation-surges-again-after-hurricane-boosts-gas-prices-cpi-shows-2017-10-13). But investors feel the disconnect between the lackluster economic data and the Fed's insistence that low inflation is transitory is nearing an inflection point, capping any further climb in long dated yields.

See: Gradual rate hikes should help sustain economic growth, Yellen says (http://www.marketwatch.com/story/gradual-rate-hikes-should-help-sustain-economic-growth-yellen-says-2017-10-15) (http://www.marketwatch.com/story/gradual-rate-hikes-should-help-sustain-economic-growth-yellen-says-2017-10-15)

Meanwhile, according to The Wall Street Journa (https://www.wsj.com/articles/trump-to-meet-with-yellen-thursday-to-discuss-fed-chief-renomination-1508181146)l, President Donald Trump will meet with Yellen on Thursday to discuss the possibility of her being renominated to her post. Her four-year term as chairwoman expires in early February.

Trump also was impressed by Stanford University economist John Taylor in their meeting (http://www.marketwatch.com/story/john-taylor-met-trump-about-fed-chair-post-2017-10-12), according to Bloomberg News (https://www.bloomberg.com/news/articles/2017-10-16/taylor-is-said-to-impress-trump-for-fed-chairman-as-warsh-slips). Taylor is the man behind the Taylor rule, which suggests interest rates should be three times higher than current levels. Market participants feel he is more hawkish than other front-runners for the job, (http://www.marketwatch.com/story/trump-looking-at-a-lot-of-people-in-search-for-next-fed-chief-mnuchin-2017-10-13) including former Fed. Gov. Kevin Warsh.

Read: Trump's pick to lead the Federal Reserve is (probably) on this list (http://www.marketwatch.com/story/pocket-guide-to-trumps-candidates-for-top-fed-spot-2017-10-05)

What did market participants say?

"If the FOMC is willing to ignore the disappointing string of core inflation figures seen during 2017 and continue delivering rate hikes, then the 'mystery' of inflation (http://www.marketwatch.com/story/feds-yellen-says-low-inflation-a-mystery-but-not-mysterious-enough-to-keep-rates-low-2017-09-20) becomes more of an academic exercise than a market event," wrote Ian Lyngen and Aaron Kohli, fixed-income strategists at BMO Capital Markets.

"Anybody who's getting the Fed chair is going to be viewed as more hawkish because Yellen was ultradovish. But I think you look at the difference between Warsh and Taylor, who is more hawkish? Warsh is more of a balance-sheet fanatic. While, Taylor is more of an interest-rate hawk," said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

What data were on investors' radar?

The Empire State manufacturing index jumped to a three-year high of 30.2 (http://www.marketwatch.com/story/empire-state-index-jumps-to-three-year-high-in-october-2017-10-16) in October from 24.4 in September. A snapshot of manufacturer's health in New York state, any number above zero indicates improving economic conditions.

Which other assets were in focus?

Meanwhile, the yield 10-year German bond yields , known as bunds, were at 0.37%, compared with 0.40% on Friday.

The dollar rose (http://www.marketwatch.com/story/dollar-firms-as-feds-yellen-reiterates-rate-hike-view-catalan-uncertainty-persists-2017-10-16)after Trump repeated his expectation to pass tax reform by the end of this year, pushing the euro lower and the Dow Jones Industrial Average , S&P 500 index and the Nasdaq Composite Index all ended at all-time highs on Monday (http://www.marketwatch.com/story/dow-poised-for-fresh-high-in-muted-trading-as-investors-brace-for-week-of-earnings-2017-10-16).

 

(END) Dow Jones Newswires

October 16, 2017 17:46 ET (21:46 GMT)

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