Yields pressured as oil falls
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The yield on the 30-year Treasury bond fell to a seven-month low Wednesday as oil prices slumped, putting pressure on a Federal Reserve that has looked past weak inflation numbers to set the stage for further monetary tightening this year.
The yield on the 30-year bond, or the long bond, fell 1 basis point to 2.724%, the lowest since Nov. 8, the day of President Donald Trump's election victory. His pro-growth agenda helped to lift yields, but much of this gain has faded as controversy over his election campaign's ties with Russia have helped complicate efforts (http://www.marketwatch.com/story/treasury-yields-sink-as-trump-fbi-controversy-intensifies-2017-05-17) to push the administration's policy agenda through Congress.
The yield for the 2-year Treasury note gained 0.4 basis point to 1.352%, while the 10-year benchmark note rose 0.3 basis point to 2.156%. Bond prices move inversely to yields; one basis point is one hundredth of a percentage point.
A slump in oil prices (http://www.marketwatch.com/story/crude-futures-hold-steady-after-falling-into-a-bear-market-2017-06-21)pushed yields down in the afternoon after the U.S. Energy Information Administration showed that weekly domestic production had risen by 20,000 barrels to 9.35 million barrels a day, despite a fall in crude supplies. Lower energy prices can pare inflation prospects, which can be bullish for U.S. government paper as they leave more of the value of a bond's interest payments intact.
Yields had risen earlier in morning trading after a release of existing home sales numbers showed a 1.1% rise in May. The month's sales (http://www.marketwatch.com/story/existing-home-sales-rebound-in-may-despite-record-low-supply-2017-06-21)represented an annual 5.62 million rate, beating economists' expectations for 5.51 million. The optimistic data point gave support to the Federal Reserve's case that recent weaker-than-expected numbers was "transitory" and conditions remain ripe for one more interest rate hike and a reduction to its balance sheet (http://www.marketwatch.com/story/fed-raises-rates-and-sets-plan-to-shrink-balance-sheet-this-year-2017-06-14).
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But many bond investors doubt the Fed's optimism over the U.S. economic outlook and have downgraded inflation prospects. The 5-year forward inflation expectation rate (https://fred.stlouisfed.org/series/T5YIFR), the bond market's assessment of future price growth, has fallen to 1.78% after hovering above 2% for most of the first quarter in 2017.
"The combination of lower rates, lower inflation and a tightening Fed are sources of concern for many investors fearing the Fed may make a policy error via overtightening. This concern is contributing to the persistence of low interest rates across the yield curve," wrote William Merz, director of fixed income at U.S. Bank Wealth Management.
See: Inflation falls again in May as CPI recedes from recent high-water mark (http://www.marketwatch.com/story/inflation-falls-again-in-may-as-cpi-recedes-from-recent-high-water-mark-2017-06-14)
Philadelphia Fed President Patrick Harker, a voting member of the central bank's interest-rate setting committee, said the September policy meeting could be a suitable time (30-year%20Treasury%20yield%20establishes%20fresh%20November%20low)for the Fed to start reducing its balance sheet. Treasury yields showed little response to his remarks
Meanwhile, Bank of England chief economist Andrew Haldane said recent U.K. economic data was "still on track" and could set up some monetary tightening there in the second half of the year. Considered a dove, his hawkish turn comes a day after Gov. Mark Carney said lingering questions over the strength of inflationary pressures meant more interest-rate hikes could be premature, especially as policy uncertainty over a messy Brexit, the split between the U.K. and the European Union, continues to overshadow the U.K. economy.
The yield on U.K. 10-year government paper, or gilts, rose 3.5 basis points on his comments. Elsewhere in Europe, the German 10-year government bond was little changed at 0.263%.
See: Brexit threatens to become a fiasco - and investors are in denial (http://www.marketwatch.com/story/brexit-threatens-to-become-a-fiasco-and-investors-are-in-denial-2017-06-19)
Also read: Pound climbs above $1.27 on hawkish view by Bank of England's chief economist (http://www.marketwatch.com/story/pound-hits-2-month-low-as-doubts-over-support-for-uk-government-weigh-2017-06-21)
(END) Dow Jones Newswires
June 21, 2017 16:58 ET (20:58 GMT)