BOND REPORT: Treasury Yields Struggle For Direction In Volatile Week

By Sunny Oh Features Dow Jones Newswires

President Donald Trump removes Steve Bannon from position as White House chief strategist

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U.S. Treasury markets ended the week nearly where they started in a volatile week of trade that included political turmoil in President Donald Trump's administration, diverging economic data, dovish Fed minutes and a terrorist attack in Spain.

Friday's trade epitomized that turbulence as reports that Trump forced out Steve Bannon as White House chief strategist, sparked some Friday trading before activity moderated.

The 2-year government bond's yield rose by less than a basis points on Friday to 1.314%, contributing to a weekly gain of 2 basis points, the largest increase in six weeks. Bond prices move inversely to yields.

The 10-year benchmark Treasury yield was mostly unchanged for both Friday and the week at 2.196%. While, the 30-year Treasury bond's yield was flat on the day at 2.779%, but nonetheless posted a five-day drop of 1.1 basis point.

Yields rebounded from their intraday lows on Friday after reports surfaced that Trump had removed Bannon, with bond traders divided about whether the news would stabilize the turmoil-ridden administration after Trump stoked a fervor due to his reaction to violence tied to a white-supremacist rally in Virginia.

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Rocky bond markets this week were driven by sharp swings in political uncertainty as a standoff between North Korea and President Donald Trump's administration abated only to give way to the dissolution of Trump's business advisory councils. Support for Trump among his own party has ebbed as several Republican senators and congressmen have condemned the president 's Charlottesville response.

"Enough key players in Congress are stepping away from the shadow cast by the Trump presidency that financial markets are marking down prospects of this president being able to achieve any constructive objectives for tax reform, infrastructure spending or health care reform," said Carl Weinberg, chief economist for High Frequency Economics, in a note to clients.

A controversial figure in Trump's inner circle, Bannon's departure may placate some because he was viewed as a key influencer of Trump's more radical views.

"There might be relief that the more fractious elements of the White house is contained. To the extent that this might look like a more Republican administration, this could soothe a lot of nerves," said Aaron Kohli, fixed-income strategist for BMO Capital Markets.

Moreover, his departure could lend strength those in his administration who favor free trade and a more globalized economy, instead of the protectionist policies that economists fear will tamp down growth prospects. This could help avert a possible trade war after a flare-up in tensions between China and the U.S. when Trump authorized an inquiry into unfair trade practices including the theft of intellectual property.

"[Bannon] favors confrontation with China, he is economically nationalistic. Whether you agree with that or not, replacing him will probably lead to less conflict against trading partners," said Kohli.

On Friday, data showed U.S. consumer-sentiment index rising to its highest level since January. The University of Michigan consumer-sentiment survey rose to 97.6 in August from 93.4 in July (http://www.marketwatch.com/story/americans-more-gung-ho-about-economy-in-august-consumer-sentiment-survey-shows-2017-08-18)and comes on the heels of retail sales that notched a 7-month high (http://www.marketwatch.com/story/us-retail-sales-soar-in-july-to-7-month-high-2017-08-15).

The 2-year Treasury yield ended broadly higher this week even after the Fed issued a set of minutes that were largely interpreted as dovish by market participants. The minutes from the Federal Reserve's July policy meeting showed central bankers were finally beginning to concede that the weakness in inflation might not be transitory, suggesting a more gradual pace of monetary tightening. Consumer prices have remained soft for five straight months since March (http://www.marketwatch.com/story/us-consumer-inflation-remains-soft-in-july-cpi-shows-2017-08-11).

On Thursday, a terrorist attack in Barcelona led to a flight to European government paper which spilled over into Friday, with assets perceived as safe attracting a rush of flows from investors fleeing equities. The German 10-year government bond's yield fell 1.2 basis point to 0.413%, as the Stoxx Europe 600 index fell 0.7% to 3041.7.

Next week, market participants will gear up for the Federal Reserve symposium in Jackson Hole, Wyo. Both Fed Chairwoman Janet Yellen and European Central Bank President Mario Draghi are expected to attend the get-together. But sources at the ECB have said Draghi wouldn't announce a major policy shift as previous rumors had suggested, even as the eurozone's economy makes a broad, steady recovery (http://www.marketwatch.com/story/eurozone-recovery-aided-by-dutch-surge-2017-08-16).

(END) Dow Jones Newswires

August 18, 2017 17:11 ET (21:11 GMT)