BOND REPORT: Treasurys Steady As Jobless-claims Data Extend Streak Of Strong Reports

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

30-year Treasury hovering around lowest yield in seven months

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U.S. Treasury yields held their ground in Thursday trade, but yields for short- and long-dated bonds were looking mixed for the week, as investors digested data and talk from Federal Reserve speakers amid a downdraft for crude-oil prices that was putting pressure on near-term inflation expectations.

The yield on the 10-year Treasury note was little changed at 2.156%, holding its level from late Wednesday in North American trade, while the 2-year Treasury note was down 0.8 basis point at 1.344%, compared with 1.352% in the previous session. The 30-year Treasury bond ticked up 0.6 basis point to 2.730%, compared with 2.724%.

Bond prices and yields move in the opposite direction.

For the week, the short-term 2-year Treasury note was up 3.3 basis points, the 10-year benchmark note was near break-even, while the long-bond, or 30-year Treasury, was 5.2 basis points lower, touching a seven-month nadir in Wednesday trad (http://www.marketwatch.com/story/treasury-yields-travel-higher-ahead-of-key-housing-number-2017-06-21)e.

Lower yields on the longer end of the bond curve may suggest that investors anticipate a weaker economic outlook. Yield moves for Treasurys come amid diminished inflation expectations, which can erode the value of a bond's fixed payment. Falling crude-oil prices, with U.S. oil entering a bear-market, defined as a decline of at least 20% from a recent peak, also has amplified expectations that consumer prices won't be substantially higher in the near term. Crude prices on Thursday, however, were steadying somewhat (http://www.marketwatch.com/story/oil-steady-but-jump-in-us-supplies-keeps-traders-on-edge-2017-06-22).

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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.

Last week, the Fed raised short-term interest rates for the fourth time since December 2015 and has signaled one more-rate increase by the end of the year. Fed speakers have acknowledged slack in inflation but have communicated a desire to lift rates. The central bank and its officials, including Chairwoman Janet Yellen, have suggested inflation should eventually pick up, citing weaker data as "one-off" as a tightening labor market leads to higher wages.

On that front, a weekly employment reading on Thursday showed that fewer than 250,000 Americans applied for unemployment benefits in mid-June (http://www.marketwatch.com/story/us-jobless-claims-edge-up-3000-to-24100-2017-06-22), underscoring the strength of a U.S. jobs market whose, but not significantly shifting bond-market sentiment.

Philadelphia Fed President Patrick Harker, a voting member of the central bank's interest-rate setting committee, in an interview with the Financial Times on Wednesday (http://www.marketwatch.com/story/feds-harker-says-plan-to-start-to-shrink-balance-sheet-could-start-in-september-2017-06-21), said the September policy meeting could be a suitable time for the Fed to start reducing its balance sheet.

Still, investors have been picking up U.S. paper rather than dumping bonds in anticipation of higher yields in the future as is typical in a so-called rate-tightening cycle.

That bond buying comes against the backdrop of U.S. equities, including the S&P 500 index and the Dow Jones Industrial Average, trading near records. Traditionally, bond prices and stock values maintain an inverse relationship.

Ajay Rajadhyaksha, head of macro research at Barclays in a Thursday research note, suggested that bonds may be getting rich relative to their riskier counterpart, stocks.

"Equities have had a strong run, and the contrarian view would be to fade this move. We believe this would be a mistake. Equity valuations are elevated, but so are global bond yields. Given the earnings resurgence, tight spreads in advanced economy credit, and the possibility of U.S. tax cuts, stocks have the least unattractive risk-reward," he said.

President Donald Trump's election victory had helped to lift yields, but much of this gain has faded as controversy over his election campaign's ties with Russia has complicated efforts to push the administration's ambitious policy agenda through Congress.

Growing appetite for U.S. government paper, compared with its European and Asian counterparts, which are offering relatively lower yields, has been credited with helping to keep yields lower, despite the Fed's plan to normalize monetary policy and shrink its $4.5 trillion balance sheet.

In Europe, the benchmark 10-year German bond, known as the bund, was yielding 0.26%.

(END) Dow Jones Newswires

June 22, 2017 08:58 ET (12:58 GMT)