BOND REPORT: Treasury Yields Plumb November Lows As North Korea Triggers Demand For Havens

By Sunny Oh Features Dow Jones Newswires

10-year Treasury yield drops below 2.08%

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Treasury prices rose, pulling yields lower, on Tuesday after North Korea tested a nuclear bomb over the weekend, spurring investors to shift to government paper and other assets seen as havens.

The 10-year benchmark Treasury yield plunged 9 basis points to 2.074%, its lowest level since Nov. 10. The 30-year bond yield dropped 8.2 basis points to 2.695%, while the 2-year note yield shed 6 basis points to 1.286%.

Treasury yields, which move inversely to bond prices, fell in the first U.S. trading session since tensions heated up in North Korea over the weekend. North Korea tested a nuclear bomb on Sunday, prompting the U.S. to tell the U.N. Security Council that Pyongyang was "begging for war." South Korea also warned that its northern neighbors could be setting up another test (http://www.marketwatch.com/story/north-korea-is-getting-ready-for-another-possible-icbm-launch-says-south-korea-2017-09-04)of its intercontinental ballistic missile.

"North Korea doesn't seem to be going away anytime soon. The rhetoric keeps going on," said Charles Comiskey, head of Treasurys trading for Scotiabank. "People don't want to be short on Treasurys."

See: How North Korea's nuclear test is rattling markets--in 5 charts (http://www.marketwatch.com/story/how-north-koreas-nuclear-test-rattled-markets-in-5-charts-2017-09-04)

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As geopolitical concerns from the Asia-Pacific region show no sign of abating, bidding from haven buyers have kept the benchmark 10-year Treasury yield close to its lowest levels since President Donald Trump's election.

Gold was up more than 0.5%, while the Japanese yen has strengthened even if presumably the island nation is within range of a missile attack. The dollar bought Yen109.23, down from Yen109.73 late Monday.

U.S. stocks followed suit, with the S&P 500 (http://www.marketwatch.com/story/wall-street-stocks-set-for-downbeat-open-as-north-korea-standoff-intensifies-2017-09-05) off more than 0.1%.

Comiskey also pointed out concerns over the economic damage from Hurricane Harvey, soft inflation data and a lack of progress in legislation for tax reform have all contributed to the strong flows into government paper.

Also read: Will Japanese yen remain a haven amid North Korea tensions? (http://www.marketwatch.com/story/will-japans-haven-status-hold-up-amid-north-korean-tensions-2017-08-15)

With economic data limited, investors focused on three voting members of the Fed's policy setting committee.

Fed Gov. Lael Brainard (http://www.marketwatch.com/story/fed-may-have-to-slow-interest-rate-hikes-given-subdued-inflation-brainard-2017-09-05) said the U.S. should raise rates more slowly as inflation remains below its 2% long-term target. Fewer rate increases are a boon to bonds, which can be hurt by monetary tightening.

Minneapolis Fed President Neel Kashkari, a voting member of the rate-setting Federal Open Market Committee this year, said during a question-and-answer session in Minneapolis that recent rate hikes may have done harm to the economy.

Dallas Fed President Robert Kaplan, also a voting member, will attend a question-and-answer session at the Dallas Business Club at 7 p.m.

Market participants are also gearing up for a European Central Bank meeting on Thursday. Expectations for an epoch-ending shift in monetary policy diminished after President Mario Draghi gave little away at the economic symposium in Jackson Hole, Wyo (http://blogs.marketwatch.com/capitolreport/2017/08/25/jackson-hole-fed-conference-live-blog-yellen-draghi-on-tap/).

Though the eurozone economy continues to strengthen, market analysts say the euro's strength, which can serve as a headwind against inflation, has shoved the monetary policy maker into a corner.

But other economists say high unemployment rates compared with the precrisis era could keep the ECB's foot on the pedal. Consumer prices in the eurozone grew 1.5% year-over-year at August, while the unemployment rate stood at 9.1% in July, above 1.8% of its 2008 levels.

"Slack is abundant in the labor market, and in the economy overall. As such, it is no mystery why in inflation metrics are well below target," said Carl Weinberg, chief economist for High Frequency Economics, in a note to clients.

Like Treasurys, the yield for the German 10-year government bond, considered one of the world's few haven investments, was down 3.1 basis point to 0.336%.

(END) Dow Jones Newswires

September 05, 2017 13:39 ET (17:39 GMT)