BOND REPORT: Treasury Yields Rise As Haven Demand Ebbs

By Sunny Oh Features Dow Jones Newswires

White House, lawmakers make progress toward tax overhaul: report

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Treasury yields rose on Tuesday trade as bond investors shed government paper and other assets perceived as havens in favor of stocks after a news report said the White House and Congress had made progress in coming up with a more concrete plan for a tax overhaul.

The 10-year Treasury yield rose 3.3 basis points to 2.215%, while the 30-year bond's yield added 2.4 basis points to 2.789%. The yields for both maturities reversed the previous session's decline.

The yield for the 2-year Treasury note added 2.4 basis points to 1.326%. Bond prices move inversely to yields.

Treasurys endured a bout of selling pressure, pushing yields higher, after 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.

"I would attribute the selloff to the risk-on sentiment in equities as well as the story on substantial tax reform," said Subadra Rajappa, head of U.S. rates strategy at Société Générale.

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In addition, key figures in Washington tried to allay concerns that the U.S. could see a repeat of the debt ceiling crisis. Treasury Secretary Steven Mnuchin said he was confident Congress would raise the borrowing limit before October. Senate Majority Leader Mitch McConnell, R-Ky., echoed his remarks, saying there was a "zero chance" of a government shutdown.

"There was very little clarity in the last several weeks on politics and tax reform, and now we're approaching September, we're getting a few more sound bites," Rajappa added.

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)

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 Yen109.47 on Tuesday, compared with Yen108.98 late Monday in New York. At the same time, gold prices lost $5.70 to end at $1285.1 an ounce, its decline coming a day after the precious metal settled at a three-month high.

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 battle 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 1.2 basis point to 0.399%, 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.

Italian bond yields climbed after an interview with former Italian President Silvio Berlusconi resuscitated talk of a parallel currency. The yield for the Italian 10-year government bond, the interest payment for which is denominated in euros, rose 6.2 basis points to 2.092%.

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 16:01 ET (20:01 GMT)