BOND REPORT: 10-year Treasury Yield Falls By The Most In 6 Weeks On Government Shutdown Fears

By Sunny Oh Features Dow Jones Newswires

Trump threatened to shut down the government to pay for the border wall between Mexico and the U.S. at a rally in Phoenix.

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Treasurys saw buying, dragging yields lower, on Wednesday after President Donald Trump threatened to shut down the government if he didn't get funding for a U.S.-Mexico border wall.

The comments made at a pro-Trump rally in Phoenix represent a flashpoint for investors sensitive to the possibility of temporary closure of the Federal government amid a looming debt-ceiling deadline.

The benchmark 10-year Treasury yield shed 4.4 basis points to 2.171%, the largest single-day yield decline since July 18. The 2-year Treasury yield ticked lower 1.6 basis point to 1.309%, while the 30-year Treasury bond's yield lost 4 basis points to 2.748%. Bond prices move in the opposite direction of yields.

Trump said he was willing to "close down" the government to pay for the border wall (http://www.marketwatch.com/story/trump-threatens-shutdown-over-border-wall-funding-predicts-end-of-nafta-2017-08-22)separating U.S. and Mexico at the late-Tuesday rally. He also said he could end the North American Free Trade Agreement, which he said was responsible for the loss of manufacturing jobs in the U.S.

"In the short term, safe haven buying has pushed [Treasury prices] higher. We had Trump talking about two things: the [North American Free Trade Agreement] agreement and letting us hit the debt ceiling and shut down the government if [Congress] doesn't give him funds for the border wall. This caused some concern in the marketplace," said Larry Milstein, managing director of Treasurys trading at R.W. Pressprich & Co.

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See: Trump 'shutdown' threat rattles stock market (http://www.marketwatch.com/story/trump-shutdown-threat-rattles-stock-market-2017-08-23)

Assets perceived as havens other than Treasurys such as the yen (http://www.marketwatch.com/story/dollar-wanes-against-euro-yen-as-us-tax-reform-doubts-resurface-2017-08-23) and gold (http://www.marketwatch.com/story/gold-higher-as-dollar-nicked-by-economic-agenda-uncertainty-2017-08-23) attracted bidders following his contentious statements. Gold for December deliveryrose $3.70, or 0.3%, to settle at $1,294.70 an ounce (http://www.marketwatch.com/story/gold-higher-as-dollar-nicked-by-economic-agenda-uncertainty-2017-08-23). Against the yen, the greenback bought Yen109.03, compared with Yen109.57 late Tuesday in New York.

Although Trump has made similar pronouncements before, it revealed the lack of clarity surrounding the new administration's relationship with congressional leaders as the calendar approaches the deadline for raising the debt ceiling in autumn. His remarks came on the back of promises made by Sen. Majority Leader Mitch McConnell, R-Ky., (http://www.marketwatch.com/story/sen-mcconnell-says-theres-zero-chance-us-wont-raise-debt-ceiling-2017-08-21) and Treasury Secretary Steven Mnuchin that the U.S. would pass a hike to the debt ceiling without trouble.

As geopolitical drama continues to overshadow U.S. financial markets, traders monitored economic data. Manufacturing purchasing managers' indexes, or PMIs, from IHS Markit showed a reading of 52.3, a two-month low, (http://www.marketwatch.com/story/manufacturing-service-flash-pmi-readings-split-direction-in-august-2017-08-23) in contrast with jump in services PMI to a 28-month high of 56.9. Any reading above 50 indicates expansion. A reading of new home sales, meanwhile, was down to a 7-month low of 9.4% (http://www.marketwatch.com/story/new-home-sales-skid-to-7-month-low-in-july-2017-08-23), slowing to an annual 571,000 pace from the 608,000 median forecast from economist surveyed by MarketWatch.

And Dallas Fed President Robert Kaplan, a voting member, reaffirmed his stance that he would wait for further data before deciding on a rate hike this year, although he conceded that tightest labor market in 16 years (http://www.marketwatch.com/story/us-gains-209000-jobs-in-july-unemployment-retouches-16-year-low-of-43-2017-08-04) could warrant a shift away from monetary accommodation.

Meanwhile, European Central Bank President Mario Draghi spoke at Lindau, Germany (http://www.marketwatch.com/story/european-stocks-tilt-lower-even-as-factory-activity-stays-strong-2017-08-23)on Wednesday before the much-awaited conference at Jackson Hole, Wyo. He offered few clues on the outlook for the ECB's monetary policy, leaving the euro unchanged.

Analysts said his comments revealed moderation after the euro surged against the dollar and yields rose following comments that were read as hawkish at a speech in Portugal in late June, when Draghi said he saw signs of reflation in the eurozone, leading the euro higher as currency traders anticipated an end to the ECB's EUR60 million ($70.8 billion) monthly asset-purchasing program.

But some economists say the focus on the currency's swings distract investors from arguably a more important piece in the central bank's calculus--the rebound in growth across the eurozone. The economic bloc grew at a healthy clip of 2.5% in the second quarter (http://www.marketwatch.com/story/eurozone-recovery-aided-by-dutch-surge-2017-08-16), closely matching the 2.6% seen in the U.S (http://www.marketwatch.com/story/us-gdp-accelerates-to-26-in-second-quarter-2017-07-28).

"For the ECB the key thing is whether the recovery is continuing to broaden out, not the precise level of the euro," said David Owen, chief European financial economist at Jefferies.

The yield for the 10-year German bond, also known as the bund, slipped 2 basis points lower.

(END) Dow Jones Newswires

August 23, 2017 16:20 ET (20:20 GMT)