BOND REPORT: Treasury Yields Pinned In Narrow Range As Clearer Inflation View, Next Auction Awaited
By Mark DeCambre, MarketWatch , Sunny Oh
10-year Treasury yield holds around 2.16% after producer price index release
U.S. Treasurys stabilized, leaving yields little changed, on Wednesday as traders showed minimal interest in a middling report on producer prices in favor of consumer price data due out in the following session.
The 10-year Treasury note yield was slightly lower at 2.166%, 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 2.764% 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.
The Labor Department's producer-price index for August came in at 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.
"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 to staff cuts to maintain profit margins and, possibly, 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 42% chance of one more rate increased by the Fed before the end of 2017, according to CME Group Data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
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.
Looking ahead, the Treasury Department is slated to auction $12 billion in 30-year 2.75% bonds. On Tuesday, a $20 billion auction of 10-year notes received a tepid response, perhaps reflecting a lowered outlook for risks that had driven bond prices higher and yields lower over the past several sessions.
Yields have been largely pressured by concerns about tensions between North Korea and the U.S. and the impact of Hurricanes Irma and Harvey on the overall economy. Recent yield moves 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.
In exchange-traded products, the popular bond alternative iShares 20+ Year Treasury Bond ETF (TLT) was up slightly at 0.1%. The fund, also known as TLT for its ticker symbol, has risen 6.4% so far this year.