BOND REPORT: Treasury Yields See Largest One-day Rise In More Than 2 Weeks

By Sunny Oh Features Dow Jones Newswires

10-year Treasury yield approaches 2.30% mark

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Treasury yields climbed the most in two weeks after President Donald Trump's new budget raised prospects of higher growth and inflation, offsetting a brief flight to quality triggered by a bombing at a U.K. concert venue.

The yield on the 10-year Treasury note rose 3.1 basis points to 2.285%, having fallen as low as 2.225% in early morning trading. Bond prices move in the opposite direction of yields; one basis point is equal to one hundredth of a basis point.

The yield on the 2-year note added 2.9 basis points to 1.275%, while the yield for the 30-year bond, jumped 3 basis points to 2.946%. Both the short-end and long-end Treasury notched their largest one-day yield surge in more than two weeks.

Yields saw sturdy gains after the White House released its budget request (http://www.marketwatch.com/story/more-than-2-trillion-in-savings-to-come-from-economic-growth-trump-budget-2017-05-22)for 2018. If President Donald Trump can pass his request through Congress, it could help revive the reflation trade as investors mark up expectations of his pro-growth policies including tax reforms and an infrastructure bill. But Paul Ashworth, chief economist at Capital Economics, however described it as an "opening gambit" that was unlikely to make it through the Senate.

The so-called reflation trade was previously boosted by expectations Trump's policy proposals would boost growth and lift inflation, benefiting stocks at the expense of bonds. But prices for both assets have recently traveled alongside each other, a reflection of the market's uncertainty over prospects for the Trump proposals, including tax cuts and increased infrastructure spending.

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"This is a very growth-oriented budget that they are presenting, the markets woke up towards that and they started aggressively pricing it in," said Tom di Galoma, managing director for Treasurys trading at Seaport Global Securities.

But the steady ascent for Treasury yields on Tuesday was momentarily disturbed in midafternoon trading after an auction of $26 billion of 2-year Treasury notes enjoyed enthusiastic demand. Government sales of Treasury notes can impact prices and yields for the overall market.

The bid-to-cover ratio for the auction was 2.90, the highest since May 2016. The ratio serves as a gauge of investor appetite by comparing the amount of bids received to the amount of bids accepted. Analysts had expected a weak auction as the date for the Fed's monetary policy decision looms in three weeks.

"We sold off ahead enough to draw the buyers in. We haven't seen the bid for the 2-year note that high in quite some time," said di Galoma.

Yields had slumped earlier as a terrorist bombing at a concert late Monday in Manchester stirred geopolitical concerns, pushing investors to U.S. government paper and assets considered as safe during overnight sessions. Moves were modest, however, with the dollar slipping 0.1% to 111.17 yen per dollar, while gold gave back early gains (http://www.marketwatch.com/story/gold-pulls-back-from-three-week-high-as-dollar-index-firms-2017-05-23).

See:Death toll rises to 22 in suspected suicide bombing in Manchester (http://www.marketwatch.com/story/death-toll-rises-to-22-in-suspected-suicide-bombing-in-manchester-2017-05-23)

(http://www.marketwatch.com/story/death-toll-rises-to-22-in-suspected-suicide-bombing-in-manchester-2017-05-23)Investors will eye speeches from senior Fed officials to gauge the level of disagreement on the possibility of two further rate increases this year among its interest-rate setting committee. Fed. Governor Lael Brainard said on Monday it was unclear if the U.S. economy was at full employment or if labor slack continued to linger in the jobs market. Inflation was weaker than expected in March and April, even though U.S. unemployment levels are currently at 4.4%, a touch below the level considered full employment.

On Wednesday, the central bank will release the minutes from the Fed's two-day policy meeting in early May.

See: Fed minutes may quell doubt about a June interest-rate hike (http://www.marketwatch.com/story/fed-minutes-may-quell-fresh-doubts-about-a-june-rate-hike-2017-05-19)

Minneapolis Fed President Neel Kashkari, a voting member this year of the Fed's rate setting policy panel, said the soft inflation readings were "concerning (http://www.marketwatch.com/story/feds-kashkari-says-soft-inflation-readings-are-concerning-2017-05-23)," suggesting he was not in a hurry to raise rates. As a well-known dove, traders were not surprised by Kashkari's comments with Treasury yields showing little response. Fed President Patrick Harker, also a voting member, will give a talk on the economic outlook in New York City at 5 p.m. Eastern.

(END) Dow Jones Newswires

May 23, 2017 16:50 ET (20:50 GMT)