BOND REPORT: Treasury Selling Pressure Pushes 10-year Yield Above 2.15%

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

Auction for 10-year Treasurys fails to pique investor interest

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U.S. Treasurys saw additional selling on Tuesday, pushing yields higher, with the 10-year yield retaking levels seen at the end of August as geopolitical tensions have ebbed somewhat.

The 10-year Treasury note yield was at 2.171%, up 4.6 basis points, compared with 2.125% late Monday in New York, while the 30-year Treasury yield was at 2.774%, up 3.5 basis points, versus 2.739%. Meanwhile, the yield on the 2-year note was at 1.343%, up 2.5 basis points, compared with 1.318% in the prior session.

Bond prices and yields move inversely.

On Monday, Treasurys saw their most intense selling in months, driving yields higher, as appetite for assets perceived as havens diminished after Hurricane Irma hit Florida with less force than feared and North Korea refrained from conducting another missile test. The 10- and 30-year notes saw their biggest yield jump since July 25 (http://www.marketwatch.com/story/treasury-yields-climb-as-hurricane-north-korea-fears-ease-2017-09-11), while the 2-year note saw its largest climb since April 24, according to WSJ Market Data Group.

Late Monday, the United Nations Security Council unanimously adopted new sanctions (http://www.marketwatch.com/story/north-korea-slapped-with-tough-new-sanctions-by-un-security-council-2017-09-11)against North Korea, in response to a series of recent ballistic missile tests, including one over Japan airspace in late August (http://www.marketwatch.com/story/north-korea-test-fires-ballistic-missile-over-northern-japan-reports-2017-08-28) and a thermonuclear bomb (http://www.marketwatch.com/story/north-korea-hails-perfect-success-of-latest-nuclear-test-triggering-magnitude-63-earthquake-2017-09-03) earlier in the month. Both events had rattled markets sending investors to havens like government paper and gold futures .

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However, concerns over hurricanes, specifically Irma in Florida, and tensions in the Korean Peninsula have given way to a focus on the economic data and expectations about Federal Reserve-led interest-rate increases in coming months.

Later this week, bond investors will get a look at inflation, with the producer-price index expected to be released (http://www.marketwatch.com/Economy-Politics/Calendars/Economic) on Wednesday and the consumer-price index scheduled for Thursday.

Inflation readings, running below the Fed's 2% annual target, have remained subdued, adding to questions about the central bank's next move as it aims to normalize monetary policy. Calculating the impact of the recent deadly storms, including Hurricane Harvey, which swamped the Houston area, may also factor into policy decisions. Because higher inflation and rising prices can erode a bond's value, lower inflation has helped to push yields lower and prices higher.

Rising yields suggest that investors are expecting a slightly greater chance that the Fed may continue on its current rate increase path. Wall Street is pricing in a roughly 47% chance of another rate increase by the end of 2017, up from 27% late last week, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

The monthly Job Openings and Labor Turnover Survey, or JOLTS report, for July revealed tightness in labor markets as the number of firms reporting difficulties filling job vacancies neared a 16-year high. Meanwhile, the small business optimism index rose a negligible 0.1 point to 105.3. The positives instead showed up in the capital expenditures sentiment index, which rebounded to a 13-year high.

"The recent recovery in business equipment investment has further to run," said Andrew Hunter, U.S. economist at Capital Economics, in a note.

He felt the bump in the capital spending index ran counter to the view held by conservative economists and President Donald Trump that postcrisis financial regulations like Dodd-Frank were preventing small businesses from accessing loans.

On the auction front, the Treasury Department sold $20 billion in nine-year, 11-month 2.25% notes. Like Monday's auction of three-year notes, the sale had trouble whetting investors' appetites with investors concerned last week's yield decline was overdone.

"It's clear just based on the two auctions seen this week that yields got too low for investor taste at least for now," wrote Peter Boockvar, chief markets analyst for the Lindsey Group.

(END) Dow Jones Newswires

September 12, 2017 14:23 ET (18:23 GMT)