Treasury Bonds Pull Back for Second Straight Day

By Min Zeng

Treasury bonds pulled back on Wednesday for a second straight session as the latest inflation report spurred investors to take some chips off the table.

In late-afternoon trading, the benchmark 10-year note was 8/32 lower, yielding 2.234%. Yields rise as prices fall.

The yield remains sharply below 3% at the start of the year.

The consumer price index for September rose by 0.1% after a decline of 0.2% a month earlier. The modest rise matched economists forecast, but it soothed concerns that inflation could continue to fall to alarmingly low levels amid uneven global growth and falling commodities prices.

A weaker inflation report might have bolstered the case for the Federal Reserve to delay ending its monthly bond buying program from next week's policy meeting. The Fed's bond purchases have been a main factor keeping bond yields near historic lows.

"It is likely we see the Fed end its bond buying" next week, which generated some profit-taking in the bond market, said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.

Traders said another factor sending bond yields higher was planned sale of new bonds from Verizon Communications Inc. (VZ).

Ahead of selling new bonds, companies typically sell Treasury bonds as a hedge to neutralize unwanted interest fluctuation. Some investors also sold Treasury bonds to buy corporate bonds which offer higher yields compared to U.S. government debt.

Contained inflation would continue to give the Fed some breathing room in raising interest rates even if they stops buying bonds, which would continue to keep a lid on bond yields, according to some investors and traders.

The annual rate of September's CPI was 1.7%, staying below the Fed's 2% target rate. Some market-based inflation expectations have also slipped under the Fed's target over the past few weeks.

Eurozone's struggling economy and alarmingly low inflation has been a main focus of global investors this month, which sparked broad selloff in European and U.S. stocks last week and fueled strong demand for ultrasafe U.S. government bonds. At one point last week, the 10-year Treasury note's yield fell to 1.87%, the lowest level since May 2013.

Over the past few sessions, financial markets have shown signs of stabilization from last week's turmoil. Some traders said uncertainty over the global economy may continue to generate price swings in financial markets and keep Treasury yields at low levels.

"Equities have been able to retrace a little less than two thirds of the sell off that began in mid-September in the past five days, which is removing some of the flight to quality bid we saw last week" in Treasury bonds, said Arthur Bass, managing director and interest rate strategist at Newedge USA LLC in New York. "It is still uncertain whether this will be a longer term trend, but for the moment things have stabilized."

 
COUPON  ISSUE   PRICE      CHANGE   YIELD     CHANGE 
1/2%    2-year 100 7/32    dn 1/32  0.378%     +2.4BP 
7/8%    3-year 100 7/32    dn 3/32  0.795%     +3.2BP 
1 5/8%  5-year 101 14/32   dn 6/32  1.447%     +3.7BP 
2%      7-year 101 15/32   dn 7/32  1.898%     +3.6BP 
2 3/8% 10-year 101 8/32    dn 8/32  2.234%     +2.8BP 
3 1/8% 30-year 102 10/32   dn 14/32 3.007%     +2.2BP 
2-10-Yr Yield Spread: +185.6BPS Vs +184.7BPS 
 
Source: Tradeweb/WSJ Market Data Group 
 

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