BOND REPORT: Treasury Yields Tiptoe Higher After Subsiding Geopolitical Tensions, Upbeat Data

By Mark DeCambre, MarketWatch , Sunny Oh Features Dow Jones Newswires

Second-quarter GDP revised to a 3% clip, above expectations of a 2.8% increase

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U.S. Treasury yields rose slightly, with the benchmark 10-year yield staging inching up from a nine-month low, on Wednesday, a day after bonds drew bids on the back of intensifying fears about military tensions in the Korean Peninsula.

Traders also kept one eye on flooding in the Houston area after then-Hurricane Harvey wreaked havoc on the fourth largest U.S. city, flooding its metropolis, causing billions of dollars of damage, and hobbling one of the premiere crude-oil refining hubs in the country.

On Wednesday, the benchmark 10-year Treasury yield ticked around 1 basis point higher to 2.145%, still close to its lowest yield level since Nov. 10, according to WSJ Market Data Group. While, the 30-year bond's yield was virtually unchanged at 2.748%.

What little of Wednesday's yield action showed up in trading for the short-end of the Treasurys market after a strong private-sector payrolls report and better-than-expected second quarter GDP numbers.

The 2-year note's yield, more sensitive to the vagaries of expectations for Fed policy, notched an intraday high before settling at 1.333%, compared with 1.323% late Tuesday. Higher growth and inflation expectations can raise the prospect of an increase in interest rates, all of which are bearish on bonds, and can push yields higher.

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The updated number for second-quarter GDP rose 3%, compared with a 2.8% median consensus forecast from economists surveyed by MarketWatch.

See: U.S. economic growth hits 3% rate in second quarter (http://www.marketwatch.com/story/us-economic-growth-hits-3-rate-in-second-quarter-2017-08-30)

President Donald Trump and his White House officials have suggested a long-term target of above-3% GDP growth is possible, but economists say the administration would have trouble sustaining such a heady pace. Trump is relying on speedy growth to generate enough revenue for the government to pay for tax cuts and more infrastructure spending.

On Wednesday at the end of the day's trading, he said he wanted to reform the tax code and repeated his desire to see the corporate tax rate reduced from 35% to 15% (http://blogs.marketwatch.com/capitolreport/2017/08/30/live-blog-and-video-of-president-donald-trumps-tax-reform-speech/).

ADP reported that private-sector payroll (http://www.marketwatch.com/story/private-sector-job-growth-surges-in-august-adp-says-2017-08-30) has risen 237,000 in August, a sharp rise from 201,000 in July. Once considered a close proxy for nonfarm-payrolls, the ADP private-sector jobs number has undershot the closely watched payrolls report by 24,000 in the last three out of four months, said Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets. He added this could still imply a strong showing in Friday's job number.

Yet the lack of reaction to the data releases reflects the large group of bidders waiting to buy dips as part of their monthly portfolio rebalancing, market participants said. Bond-fund managers have to purchase longer-dated Treasurys to match the duration of their overall portfolio against their competing index, as their debt investments mature.

"What's keeping the market from completely falling apart is month-end extensions. Clients have to extend the duration of their bond portfolios either today or tomorrow," said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

Beyond economic data, bond traders were focused on abating geopolitical concerns. Market participants on Tuesday attributed receding anxieties in the market to a subdued reaction to North Korea's launch of a ballistic missile over Japanese airspace, reviving the geopolitical fears that had unsettled Wall Street amid a series of testy verbal exchanges between Pyongyang leader Kim Jong Un and President Donald Trump over the summer.

"We're seeing some unwind from the flight to quality trade," said di Galoma.

Elsewhere, the German 10-year government bond rose 1.4 basis point to 0.358%, after the country's inflation rate rose 1.8% in August on a year-on-year basis, up from 1.5% in the previous month. The improving data could put pressure on the European Central Bank to signal a wind-down of its EUR60 billion ($71.3 billion) asset-purchasing program.

(END) Dow Jones Newswires

August 30, 2017 16:28 ET (20:28 GMT)