BOND REPORT: Treasury Yields Slightly Higher As Investors Expect Fed To Wind Down Balance Sheet

By Sunny Oh Features Dow Jones Newswires

Fed policy makers will wrap up a 2-day meeting Wednesday

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Treasurys pulled back Monday, pushing yields higher, as investors await a meeting of Federal Reserve policy makers that's expected to begin the process of winding down the central bank's balance sheet.

The benchmark 10-year Treasury yield ticked higher to 1.393%, after settling at 1.384% late Friday. The 2-year Treasury note yield was up to 2.222%, versus 2.202%, while the 30-year bond yield edged higher to 2.787%, compared with 2.772% on Friday.

Bond prices move inversely to yields.

The Federal Reserve is expected to kick-start the reduction of its balance sheet on Wednesday. But some say with so much of the plan articulated and anticipated beforehand, the bond market reaction would be muted.

See: Why the bond market isn't freaking out from the Fed's shift to quantitative tightening (http://www.marketwatch.com/story/why-the-bond-market-isnt-freaking-out-from-the-feds-shift-to-quantitative-tightening-2017-09-14)

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Instead, analysts highlighted that changes to the dot plot, individual Fed members forecasts for future interest rates, could unsettle investors. In addition, the risk is that Federal Reserve Chairwoman Janet Yellen "takes a more dismissive line toward the downside surprises in the inflation data," wrote Matthew Hornbach, an interest-rate strategist for Morgan Stanley.

Read:Fed to take historic leap into the unknown (http://www.marketwatch.com/story/fed-to-take-historic-leap-into-the-unknown-2017-09-14)

He said if Yellen aligns with New York Fed President William Dudley it could give a rude shock to those who feel economic data should play a bigger role in dictating policy. In a speech two weeks ago, Dudley reaffirmed his desire to see a December rate increase even after he acknowledged the last few months of soft inflation readings.

Also read: Fed's Dudley shows no signs of wavering from support for December interest-rate hike (http://www.marketwatch.com/story/feds-dudley-shows-no-signs-of-wavering-from-support-for-december-interest-rate-hike-2017-09-07)

But last week's stronger-than-expected inflation number (http://www.marketwatch.com/story/higher-rents-gas-boost-inflation-in-august-cpi-shows-2017-09-14)could give Yellen and other Fed members the support they need to raise interest rates one more time this year, especially if the bounce in consumer prices persists into a more substantial uptrend.

Even as the Fed is expected to embark on a form of monetary tightening, other central banks are nowhere near taking their feet off the pedal. The Bank of Japan is likely to maintain its so-called yield curve control policy, where it targets certain interest rates in the bond market through asset purchases, at Thursday's meeting.

Political risks failed to abate as President Donald Trump is slated to speak on Tuesday at the United Nations. Though Secretary of State Rex Tillerson has said he is pursuing "a peaceful solution" (http://www.marketwatch.com/story/us-is-looking-for-a-peaceful-solution-to-the-north-korea-crisis-says-rex-tillerson-2017-09-18) to the tensions in the Korean Peninsula. Ambassador Nikki Haley suggested Trump's previous threats of raining down "fire and fury" (http://www.marketwatch.com/story/how-trumps-threat-of-fire-and-fury-is-rattling-stock-market-calm-2017-08-09) on the North Korean regime were not empty threats.

""If North Korea keeps on with this reckless behavior, if the United States has to defend itself or defend its allies in any way, North Korea will be destroyed," she said.

But recently, the impact geopolitical concerns from North Korea has had on markets seem subdued. After the regime launched its international continental missile over Japan, investors didn't blink, with yields staying relatively unchanged on Friday (http://www.marketwatch.com/story/short-dated-treasury-yields-rise-as-traders-await-data-deluge-fed-meeting-2017-09-15).

Elsewhere, Portuguese bonds rallied, with the 10-year government bond yield plummeting 27 basis points after S&P Global Ratings raised Portugal's credit rating to "investment-grade" status on late Friday. The ratings company boosted the country's growth forecast to an annual 2% between 2017 and 2020, also reflecting the "solid progress [Portugal] has made in reducing its budget deficit."

(END) Dow Jones Newswires

September 18, 2017 10:30 ET (14:30 GMT)