BOND REPORT: Treasury Yields Climb As Hurricane, North Korea Fears Ease

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

The 10-year Treasury note is coming off its worst weekly drop in 4 months

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U.S. Treasury prices fell, pushing up yields on Monday as investor appetite for assets perceived as havens diminished after Hurricane Irma hit Florida with less force than feared and North Korea refrained from conducing another missile test.

The 10-year Treasury yield was at 2.098%, compared with 2.058% late Friday in New York, while the 2-year note yield was at 1.290%, versus 1.270% in the prior session. The yield on the 30-year Treasury, known as the long bond, was at 2.711%, compared with 2.678% late Friday. Yields and bond prices move in opposite direction.

Over the weekend, Hurricane Irma produced less destructive force than had been anticipated, while geopolitical tensions eased somewhat after North Korea failed to conduct another missile test, as some had predicted might happen to mark the anniversary of the country's founding.

So-called risk assets like stocks were drawing bidders, with the Dow Jones Industrial Average and the S&P 500 index set to open higher (http://www.marketwatch.com/story/dow-futures-up-more-than-100-points-as-fears-ease-over-hurricane-irma-north-korea-2017-09-11). Meanwhile, gold futures , considered a haven asset, were trading lower (http://www.marketwatch.com/story/gold-backs-away-from-one-year-highs-as-tensions-over-north-korea-ease-2017-09-11).

A combination of worries over President Donald Trump's waning pro-growth agenda, rising tensions between the U.S. and Pyongyang and hurricanes swirling in the Atlantic had helped to drive yields, which move inversely to price, lower. The 10-year note, for example, saw its largest weekly drop in more than four months (http://www.marketwatch.com/story/10-year-treasury-yield-hovers-above-key-2-level-2017-09-08).

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Still, tensions may return with a U.N. Security Council vote due Monday that calls for further and tougher sanctions on the isolated nation. More saber rattling was heard out of North Korea on Monday over potentially harsher sanctions for the country after its sixth nuclear test.

Bond investors must balance must balance risk momentarily subsiding against the outlook for a further rate increase in 2017. Expectations had fallen to around 27%, but Wall Street was pricing in the expectation of about 42% on Monday, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

On Friday, William Dudley, the president of the New York Federal Reserve, said havoc wreaked by Hurricanes Harvey and Irma could lift the U.S. economy (http://www.marketwatch.com/story/feds-dudley-says-hurricanes-harvey-irma-to-give-unfortunate-boost-to-us-economy-2017-09-08) in 2018, owing to the rebuilding that will be needed.

The impact of the hurricanes on the U.S. economy could be another factor the Fed uses to determine monetary policy in the short term, though economists said the impact may be too transitory to alter the Fed's path.

Treasury traders have been mostly focused on stubbornly low inflation amid a batch of data that has so far communicated a mixed outlook of the U.S. economy. Inflation, meanwhile, has been running below the Fed's 2% annual target, which has made some central bankers reluctant to lift rates further for fear of stymieing what may be tepid growth. A flattening yield curve, where the differential between the rates of short-term notes and longer-term securities, also has raised concerns, since a flattening, or inverted, yield curve suggests economic weakness.

"There is no way the Fed is going to raise policy rates to flatten or invert the curve. This is one reason why, we believe, the Fed pulled forward the timing of its balance sheet reduction from December to September. In doing so, the Fed hopes that some increase in 10-year real yields will create the space for it to continue to raise the funds rate," wrote analysts at TS Lombard led by Chief U.S. Economist Steven Blitz, in a Saturday research note.

Balance sheet reduction refers to plans for the Fed to shrink its $4.5 trillion asset portfolio, which can serve as an additional tightening measure for markets, along with lifting interest rates.

Looking ahead, investors are expecting a trove of bond auctions this week. The Treasury Department will auction $148 billion in securities, comprising $77 billion in new debt and $71 billion in previously sold debt. Such auctions have a tendency to push yields higher as investors sell bonds to accommodate for the new offerings.

(END) Dow Jones Newswires

September 11, 2017 09:00 ET (13:00 GMT)