BOND REPORT: Treasury Yields Extend Week's Rise As Clearer Inflation View Awaited
By Mark DeCambre, MarketWatch , Sunny Oh
10-year Treasury yield holds around 2.16% after producer-price index release
U.S. Treasurys picked up where they had left off, pushing yields lower, on Wednesday as investors continued to rotate out of government paper and other assets perceived as less risky, while traders looked ahead to consumer price data.
The 10-year Treasury note yield was slightly higher at 2.184%, compared with 2.171% late Tuesday in New York, but still markedly higher relative to its levels last week. The 30-year Treasury yield edged slightly lower, at 2.783% in recent trade, versus 2.774%, while the yield on the short-term 2-year Treasury note held steady at 1.335%.
Bond prices and yields move in the opposite direction.
Long-dated Treasurys notched their third straight session of losses as bond investors unwound haven plays seen last week. The 10-year Treasury yield ducked under 2.10% on concerns about tensions between North Korea and the U.S. and the impact of Hurricanes Irma and Harvey on the overall economy. The recent yield rise suggest, however, that traders are placing less odds on any lasting effect on markets and the economy.
The abatement of those fears has rejuvenated appetite for assets perceived as risky and pushed the Dow Jones Industrial Average , the S&P 500 index and the Nasdaq Composite Index to their first day of simultaneous records since late July on Tuesday. Stocks were struggling to advance that performance on Monday.
"With the better risk-on environment, we've completely reversed the yield compression from last week," said Marvin Loh, senior fixed-income strategist for BNY Mellon.
Assets perceived as haven investments other than government paper also sustained losses. The yen traded against the dollar at Yen110.47 from Yen110.17 on Tuesday in New York. While, gold prices shed $4.5, or around 0.35%, to $1327.8 per ounce.
The Labor Department's producer-price index for August came showed a 0.2% increase, below the average estimate for a 0.3% rise, in a survey of economists by MarketWatch. The rebound follows a fall of 0.1% for July , which marked the first drop in almost a year.
Over the past year, producer prices have decelerated to a 1.9% annual rate, and have steadily dipped from a high of 2.5% in April. The July annual rate has been the lowest since January.
Muted inflation can encourage buying in government paper because rising inflation erodes a bond's fixed value, particularly in longer maturities. But analysts say that new changes to how producer prices are computed has weakened their correlation with consumer price inflation, arguably the more important figure. August CPI data is due Thursday.
"Rising input prices are on our radar as a medium-term concern, but less as an inflation driver and more as a risk to corporate profitability," said Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets, in a note to a clients. Higher producer prices could crimp earnings, leading firms to cut staff to protect profit margins. This could, in turn, reflect an economy that is at the tail-end of its expansion.
Soggy inflation has been the biggest bugaboo for global central bankers and bond investors alike. In theory, inflation and rising prices should coincide with a U.S. job market that has looked mostly healthy. However, the annual rate of inflation has fallen below the Federal Reserve's 2% target, providing some headwinds to the central bank's plan to normalize monetary policy by lifting rates and unwinding its $4.5 trillion asset portfolio.
Presently, the market is pricing in roughly 47% chance of one more rate increased by the Fed before the end of 2017, having fallen as low as 23% last week, according to CME Group Data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
But investors remain pessimistic on the outlook for a third rate hike this year. The action in the Fed fund futures market shows traders may be abiding by the trader's expression "the trend is your friend," said Loh.
As yields climb higher ahead of next week's Fed meeting, investors might "as well push the odds higher on [a December rate increase] too."
For all the importance placed on this week's inflation data, traders could be hesitant to actively trade ahead of the central bank's policy-setting meeting next Tuesday and Wednesday, where a change in policy and rates is not anticipated but where further clues about the game plan for the Fed will be closely watched.
The Treasury Department added another weak auction of 30-year bonds, to bookend a string of lackluster debt sales this week, perhaps reflecting a lowered outlook for risks that had driven bond prices higher and yields lower over the past several sessions.
In exchange-traded products, the popular iShares 20+ Year Treasury Bond ETF (TLT) was down slightly at 0.2%. The fund, also known as TLT for its ticker symbol, has risen 6.2% so far this year.