BOND REPORT: 2-year Treasury Yield Posts Biggest Single-day Jump In Five Weeks
16 October 2017 - 11:01PM
Dow Jones News
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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