BOND REPORT: Treasury Yields Climb As Fed's Dudley Reinforces Rate-hike Plan, Stocks Rise

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

2-year Treasury note jumps 4.1 basis points to 1.360%

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U.S. Treasury yields climbed on Monday as so-called risk assets drew bidders and one Fed official emphasized the central bank's plan to normalize monetary policy--factors that should theoretically push yields higher.

The yield on the 10-year Treasury note was up 2.7 basis points at 2.184%, compared with 2.157% late Friday in New York. The two-year note yield gained 4.1 basis points at 1.360%, while the yield on the 30-year Treasury bond , known as the long bond, ticked up 0.4 basis point to 2.786%, compared with 2.782% on Friday.

Yields rise as bond prices fall.

The yield rise accelerated after New York Federal Reserve President William Dudley (http://www.marketwatch.com/story/feds-dudley-says-hes-not-paying-attention-to-bond-markets-signals-of-concerns-2017-06-19) described overall economy as "pretty good," speaking at a business roundtable discussion in Plattsburgh, N.Y. He said the U.S. central bank wasn't taking cues from sluggish yields in the bond market, which should climb as the Fed tightens monetary policy. Last Wednesday, the Fed raised interest rates to a range between 1% and 1.25%, while laying out the groundwork for unwinding its $4.5 trillion balance sheet.

Bond traders have been fixed on a flattening yield curve, a line that traces yields across maturities, which has persisted despite the rate-hike cycle and implies that bond-market investors share a dimmer outlook for the U.S. economy than the Fed. Flattening yield curves tend to be looked at as a precursor to a slowing economy.

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Dudley said the Fed has to keep raising interest rates to avoid being caught flat-footed and being forced to raise interest rates too quickly, which could risk causing a recession.

Donald Ellenberger, senior portfolio manager and head of multisector strategies at Federated Investors, said Dudley's comments were a "a little on the hawkish side" and were enough to lift yields higher on Monday. Ellenberger also said a number of big deals were drawing focus away from Treasury buying, including the expected sale of Argentina's 100-year bonds, set to be priced to yield 8.25%, according to a Wall Street Journal article (https://www.wsj.com/articles/argentina-to-sell-its-first-100-year-bonds-1497882417).

Lingering questions about sluggish inflation, which can erode a bond's fixed payments, had helped to put downward pressure on yields despite the hawkish monetary-policy stance maintained by the Federal Open Market Committee and Fed Chairwoman Janet Yellen, who described recent signs of weak inflation and economic growth as "one-off."

"The FOMC statement and Janet Yellen's press conference conveyed a tone of discounting the recent bad inflation numbers and also talked about reducing the balance sheet $300 [billion] in the first year," wrote David Shiau, Treasury trader at Jeffries LLC, in a note.

Shiau said the much more aggressive pace of balance-sheet reductions by the Fed might not be received well by the market, given recent trade that shows investors are betting on a weaker economic environment.

"The issue of normalization of the composition of the balance sheet also remains very vague and has not been addressed with any specificity by Fed officials," he wrote.

Meanwhile, the Dow Jones Industrial Average and the S&P 500 index touched fresh record on Monday, powered by a rebound in the technology sector. Appetite for stocks can undercut buying in Treasurys.

In Europe, the German 10-year Treasury note , known as the bund, was at 0.29%. Lower yields throughout Europe, compared with their U.S. counterpart, also has helped to stoke appetite for U.S. sovereign paper, pressuring yields.

(END) Dow Jones Newswires

June 19, 2017 13:38 ET (17:38 GMT)