BOND REPORT: Treasury Yields Reverse Week's Early Decline As Haven Bid Ebbs

By Sunny Oh Features Dow Jones Newswires

Treasury Secretary Steven Mnuchin said he was confident Congress would raise the debt ceiling before October.

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Treasury yields rose on Tuesday trade as bond investors shed government paper and other assets perceived as safe after geopolitical concerns from Washington abated.

The 10-year Treasury yield rose 2.4 basis points, while the 30-year bond's yield added 1.6 basis points to 2.781%. The yields for both maturities reversed the previous session's decline.

The yield for the 2-year Treasury note added 2 basis points to 1.326%. Bond prices move inversely to yields.

Treasurys endured a bout of selling pressure, pushing yields higher, after key figures in Washington allayed concerns that investors could see a repeat of the debt ceiling crisis. Treasury Secretary Steven Mnuchin said he was confident Congress would raise the debt ceiling before October. Senate Majority Leader Mitch McConnell (R., Ky.) echoed his remarks, saying there was a "zero chance" of a government shutdown.

In addition, Politico reported (http://www.politico.com/story/2017/08/22/trumps-team-and-lawmakers-making-strides-on-tax-reform-plan-241873) that President Donald Trump's tax plans were back on track giving heart to those who still hold out hope for a pro-growth agenda, expectations for which have slipped markedly as Trump remains entangled with political drama since his election. The so-called reflation trade, bets that the new administration could lead to a bump in growth and inflation, is bearish for Treasurys.

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See: Debt-ceiling fears bubble up in Treasury bills (http://www.marketwatch.com/story/debt-ceiling-fears-bubble-up-in-treasury-bills-2017-07-25)

"The risk backdrop out of Washington seemed to be improving and this has helped stocks rally overnight and into the morning as the European session opened," wrote Thierry Albert Wizman, strategist at Macquarie Group, in a Tuesday research note.

As investors gain their risk appetite, safe haven assets like gold (http://www.marketwatch.com/story/gold-struggles-to-reclaim-1300-despite-safe-haven-underpinnings-2017-08-22), the Japanese Yen (http://www.marketwatch.com/story/dollar-recovers-though-hemmed-in-ahead-of-potential-rate-clues-from-feds-jackson-hole-retreat-2017-08-22)and U.S. government paper have endured modest selling pressure. The greenback bought Yen109.37 on Tuesday, compared with Yen108.98 late Monday in New York. At the same time, gold prices sagged, failing to push past the key $1,300 level.

But geopolitical concerns haven't been completely put to bed as tensions in North Korea continue to simmer. On Tuesday, Pyongyang called President Donald Trump's approach to the crisis on the Korean Peninsula "unimaginably reckless." (https://www.wsj.com/articles/north-korea-threatens-absolute-force-as-u-s-south-hold-military-drills-1503392504) Earlier this week, the U.S. and South Korea kicked off annual military exercises that North Korea's ruler Kim Jong Un may view as preparation for an invasion of the rogue nation, which has been locked in a high-stakes verbal war with Trump.

Elsewhere, the German ZEW survey, a closely watched indicator of economic sentiment in the export giant, has slipped by 7.5 points to 10 points, reflecting concerns over the sustainability of the country's pace of growth. But the 10-year German government bond's yield still rose 1.8 basis point to 0.404%, following the updraft in Treasurys.

Ian Lyngen, head of rates strategy at BMO Capital Markets, said a brittle confidence and an absence of inflation puts European Central Bank President Mario Draghi in a difficult position ahead of the conference in Jackson Hole, Wyo.

Though the ECB may hope to normalize monetary policy, pushing too aggressively to reduce the central bank's bond-buying program could roil markets and harm the eurozone's nascent recovery, he said.

See: Why Mario Draghi can't back down from ECB taper hints (http://www.marketwatch.com/story/why-mario-draghi-cant-back-down-from-ecb-taper-hints-2017-07-19)

(END) Dow Jones Newswires

August 22, 2017 12:08 ET (16:08 GMT)