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

Continue Reading Below

U.S. Treasurys saw unabated 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 climbed 4.5 basis points to 2.171%, extending its weeklong rise to more than 11 basis points. The 30-year Treasury yield rose 3.5 basis points to 2.774%, while the yield on the 2-year note was up 1.6 basis points to 1.335%. 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 .

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.

Continue Reading Below

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 National Federation of Independent Business reported that its small-business optimism index (admin.marketwatch.com/Filing/HeadlinePulse.aspx?contentType=PulseNews&docType=91) rose a negligible 0.1 point to 105.3. The positives instead showed up in the capital expenditures sentiment index, which rebounded to a post-recession high.

Also read: Looking for work? U.S. job openings hit another record (http://www.marketwatch.com/story/looking-for-work-us-job-openings-hit-another-record-2017-09-12-101034234)

"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 J.P. Morgan Chase CEO Jamie Dimon 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.

Elsewhere, the U.K. 10-year government bond yield jumped close to 9 basis points after the annual inflation rate in the U.K. picked up to an annualized 2.9% in August (http://www.marketwatch.com/story/uk-inflation-accelerates-to-29-in-august-2017-09-12). As inflation floats well above its 2% target, the Bank of England will face pressure to raise interest rates when it announces this month's policy decision on Thursday.

But BOE Gov. Mark Carney has shown a notable reluctance to raise rates on concerns that Britain's departure from the ranks of the European Union could hurt wages and discourage investment.

(END) Dow Jones Newswires

September 12, 2017 16:07 ET (20:07 GMT)