BOND REPORT: 2-year Treasury Yield Posts Largest Single-day Gain In Around Six Weeks

By Sunny Oh Features Dow Jones Newswires

Abating geopolitical concerns fuel selloff

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Treasury prices fell, driving yields higher, on Tuesday as investors off-loaded their holdings of U.S. government paper after a raft of solid economic data and easing geopolitical concerns from North Korea.

The two-year note's yield , sensitive to expectations for Federal Reserve policy, rose 2.8 basis points to 1.351%, the largest single-day jump since July 3, extending the weeklong gains to 5.6 basis points. Bond prices move inversely to yields.

The benchmark 10-year Treasury yield climbed 4.7 basis points to 2.254%, the biggest single-day gain since July 25. While, the yield for the 30-year Treasury bond , known as the long bond, rose 3.4 basis points to 2.839%.

North Korea's leader Kim Jong Un said Monday he might not launch a missile attack on Guam, according to the country's state media. But he warned that he could change his mind "if the Yankees persist in their extremely dangerous reckless actions."

See: North Korea steps back from plan to launch missiles at Guam (North%20Korea%20steps%20back%20from%20plan%20to%20launch%20missiles%20at%20Guam)

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The abating geopolitical concerns added momentum to Monday's selloff as investors carried on with their exodus from Treasurys and other assets perceived as safe. The Japanese yen , another haven investment, weakened, with the dollar rising to Yen110.53 on Tuesday, up from Yen109.63 on Monday.

"For the time being, markets have taken solace in the 'return to neutral corners,'" said Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets.

The selling pressure heated up after retail sales for July came in at a seven-month high of 0.6% (http://www.marketwatch.com/story/us-retail-sales-soar-in-july-to-7-month-high-2017-08-15), beating the 0.4% consensus forecasts from economists surveyed by MarketWatch. Indicators suggesting stronger growth, and thus, inflation, can erode the value of bonds' fixed payments. Retail sales have been an important contributor to consumer spending and growth pressures, but the figures have been anemic in the past few months.

The Bureau of Labor Statistics reported import prices grew by 0.1% in July (http://www.marketwatch.com/story/cost-of-imported-goods-rise-for-first-time-in-three-months-2017-08-15), the first time in three months and well above economists' expectations of a 0.2% fall. While, the Empire State index, (http://www.marketwatch.com/story/empire-state-factory-index-throttles-to-highest-in-nearly-three-years-2017-08-15) a barometer for manufacturers' health in New York state, surged 15 points to 25.2, a three-year high in August.

"Economic activity is going to be greater than anticipated," said Kent Engelke, chief economic strategist for Capitol Securities Management. Stronger growth could stoke inflationary pressures and raise the likelihood of another Fed rate hike. Expectations for a December rate hike edged above 50% on Tuesday, according to CME Group data. (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/?redirect=/trading/interest-rates/fed-funds.html)

New corporate supply also weighed on Treasurys as bond buyers brace for an incoming deluge of $16 billion worth of investment-grade debt from Amazon (http://www.marketwatch.com/story/amazon-to-issue-up-to-16-billion-in-debt-to-fund-whole-foods-acquisition-2017-08-14). Underwriters of the debt issue often off-load their holdings of Treasurys prior to the sale to hedge against sharp swings in interest rates.

Market participants will also look ahead to the minutes from the Federal Open Market Committee's July 26 policy meeting. The expectation is for some discussion on the inflation outlook and the reduction of the Fed's $4.5 trillion portfolio of securities, which could potentially lift yields higher.

Elsewhere, the U.K's inflation numbers came in weaker than expected (http://www.marketwatch.com/story/uk-consumer-inflation-remains-at-26-in-july-2017-08-15), stalling at a 2.6% annual growth rate in July. The tepid data calls into question Bank of England Gov. Mark Carney's remarks two weeks ago that investors were making light of the central bank's planned pace of rate increases.

But the yield for the 10-year U.K. government bond , known as gilts, barely budged at 1.083%.

(END) Dow Jones Newswires

August 15, 2017 16:21 ET (20:21 GMT)