BOND REPORT: Treasury Yields Rise From 10-month Lows After Deal To Extend Debt Ceiling Deadline

By Sunny Oh Features Dow Jones Newswires

Vice Chairman Fischer set to step down from Fed

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Treasury prices fell on Wednesday, pushing up long-term yields after President Donald Trump and lawmakers agreed to extend the debt limit for three months to mid-December, giving relief to investors who left the perceived safety of longer-term government paper.

The benchmark 10-year Treasury note yield climbed to 2.099%, from 2.072% in the previous session. The 2-year Treasury note yield was trading at 1.298%, versus 1.292% on Tuesday. Meanwhile, the 30-year bond yield added 2.6 basis points to 2.715%. Bond prices move inversely to yields.

Long-dated Treasury yields rose after the White House and lawmakers reached a deal (http://www.marketwatch.com/story/trump-agrees-to-extending-debt-limit-government-funding-to-december-democrats-say-2017-09-06) that would extend both the debt limit and government funding to Dec. 15, as well as provide aid to states devastated by Hurricane Harvey. This comes after Senate Minority Leader Chuck Schumer, D-N.Y., and House Democratic Leader Nancy Pelosi announced they would back such a deal earlier in the day. Investors could take hope from how Trump and Democrats reached across the aisle, after legislative gridlock had checked his pro-growth agenda.

The yield move comes only a day after heavy bond-buying pushed long-dated Treasury yields to fresh 10-month lows on Tuesday (http://www.marketwatch.com/story/treasury-yields-slip-as-north-korea-triggers-demand-for-havens-2017-09-05). Amid a streak of unsettling developments on the North Korean regime's nuclear capabilities and concerns about Hurricane Irma as Texas wrestles with the devastating aftermath of Hurricane Harvey, investors snapped up assets perceived as havens.

See: 'Potentially catastrophic' Hurricane Irma makes landfall in the Caribbean (http://www.marketwatch.com/story/potentially-catastrophic-hurricane-irma-makes-landfall-in-the-caribbean-2017-09-06)

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The natural disasters refuse to relent with Hurricane Irma making landfall in the Caribbean. Bond investors have speculated that the damages from Hurricane Harvey and, subsequently, Irma would leave the U.S. economy with sizable bruises, tamping down on inflation pressures. Federal Reserve Gov. Lael Brainard said in speech on Tuesday (http://www.marketwatch.com/story/fed-may-have-to-slow-interest-rate-hikes-given-subdued-inflation-brainard-2017-09-05)that Harvey would "raise uncertainties about the economic outlook for the remainder of the year."

Meanwhile, Federal Reserve Vice Chairman Stanley Fischer on Wednesday announced plans to resign (http://www.marketwatch.com/story/fed-vice-chairman-fischer-announces-resignation-citing-personal-reasons-2017-09-06), months before his term as the central bank's No. 2 official was due to expire in June. His expected departure, as early as October, comes as the market frets about who will take the No. 1 role at the Fed, with Chairwoman Janet Yellen's term ending in February. It is unclear if President Donald Trump will renominate Yellen or if she would accept an extension of her tenure, raising doubts about the complexion of the central bank in coming months as it struggles to normalize interest rates and unwind a $4.5 trillion crisis-era portfolio of government securities.

Also read: Trump's ability to control Fed sped up by Fischer resignation (http://www.marketwatch.com/story/trump-ability-to-control-fed-sped-up-by-fischer-resignation-2017-09-06)

The combination of concerns have helped to overshadow a raft of economic data released in the morning. The U.S. economy logged a smaller trade deficit of $43.7 billion, falling below the $44.8 billion from economists surveyed by MarketWatch, after both imports and exports showed a slight decline. The ISM nonmanufacturing index, a gauge of the service industry's health, rebounded to 55.3 in August from 53.9 in July, but below the median consensus forecast of 56.

The Fed's Beige Book (http://www.marketwatch.com/story/feds-beige-book-finds-worry-about-health-of-us-auto-industry-2017-09-06), a collection of anecdotes on economic conditions, followed previous iterations by flagging tight labor markets but also tepid wage growth, a conundrum for central bankers who need to see higher pay checks in the workforce to justify an exit away from accommodative monetary policy.

Elsewhere, investors eyed key monetary policy meetings after the Bank of Canada raised interest rates and awaited the European Central Bank's policy meeting on Thursday.

The Bank of Canada passed a quarter-percentage point hike for a second time in its current tightening cycle, leaving the benchmark interest rate at 1%. A surge in economic growth, which ran at 4.5% annualized rate (http://www.marketwatch.com/story/canada-is-fastest-growing-g-7-member-after-45-gdp-surge-2017-08-31) in the second quarter of this year, has put pressure on the central bank to normalize monetary policy.

Deutsche Bank's CEO John Cryan advised the European Central Bank (http://www.marketwatch.com/story/deutsche-bank-ceo-urges-ecb-to-end-cheap-money-era-2017-09-06-74851710)to begin cutting down its asset purchases, citing concerns that an era of cheap money had stoked asset bubbles "in more parts of the capital market, where we wouldn't have expected them." But analysts feel the ECB President Mario Draghi would likely try to avoid spooking markets in Thursday's meeting by highlighting the importance of keeping quantitative easing in place.

The Canadian 10-year government bond was up 9.6 basis points to 1.956%. Meanwhile, the German 10-year government bond was close to flat at 0.344%.

(END) Dow Jones Newswires

September 06, 2017 14:25 ET (18:25 GMT)