BOND REPORT: 2-year Treasury Yield Holds Around Highest Level Since 2008

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

10-year Treasury yield has climbed 12 basis points so far in September

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U.S. Treasury prices were little changed Thursday, leaving the 2-year Treasury yield near an almost nine-year high after the Federal Reserve on Wednesday indicated that it still plans to deliver another rate increase in 2017.

The U.S. central bank kept its benchmark interest rate unchanged between 1% to 1.25%, but said it would begin its historic unwind of a more than $4 trillion balance sheet in October, as expected, solidifying a recent bond selloff, driving yields higher in recent days.

See:How the 'great central bank unwind' could ignite the next financial crisis (http://www.marketwatch.com/story/how-the-great-central-bank-unwind-could-ignite-the-next-financial-crisis-2017-09-20)

The 2-year Treasury note yield , the most sensitive to Fed policy shifts, was little changed at 1.443%, after hitting its highest level since Nov. 3, 2008 (http://www.marketwatch.com/story/treasury-yields-mostly-unchanged-ahead-of-fed-policy-announcement-2017-09-20), according to WSJ Market Data Group. The 10-year Treasury note yield was steady at 2.276%, holding on to its highest level since Aug. 8. The 30-year bond yield traded 1.4 basis point lower at 2.807%, compared with 2.821% in the prior session.

Bond prices move in the opposite direction of yields.

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So far this month, the 2-year Treasury yield has climbed more than 10 basis points, the benchmark 10-year note yield has tacked on more than 12 basis points, while the yield on the 30-year bond has advanced about 6 basis points, thus far in September.

Twelve out of the 16 members of the policy-setting Federal Open Market Committee indicated they expected to deliver a rate increase--the third of the year--by the end of 2017.

Wall Street expectations for a further rate-increase jumped to about 73% probability in December, compared with 52% chance last week, CME Group data show (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

"They really have set the table [for a December rate hike.] Unless there's a sharp tightening of financial conditions, December is a done deal at this point," said Tim Alt, fund manager of rates & currencies at Aviva Investors

The Fed's plan to tighten policy comes despite subdued inflation that has been running below the central bank's annual 2% target.

In a news conference after the policy decision, Yellen acknowledged the inflation shortfall had proved more persistent and inexplicable but said the Fed was cognizant of the risk of raising rates too slowly and letting the economy overheat or too quickly and pushing it into recession. "I can't say I can easily point to a sufficient set of factors that explain this year why inflation has been as low," she said.

The equity market, which has benefited from the ultralow-rate regime bounced around but finished at all-time highs, with the Dow Jones Industrial Average and the S&P 500 booking their 42nd and 37th record of 2017 (http://www.marketwatch.com/story/us-stock-futures-in-holding-pattern-as-historic-fed-decision-looms-2017-09-20), respectively.

Meanwhile, an exchange-traded bond fund, the iShares 20+ Year Treasury Bond ETF(TLT), was poised to trade higher early Thursday.

Reaction to stronger-than-expected economic data on Thursday helped to soften the bond-buying seen earlier. Initial weekly claims (http://www.marketwatch.com/story/jobless-claims-subside-in-mid-september-despite-hurricane-damage-2017-09-21)fell sharply last week despite destructive hurricanes in Texas and Florida. Meanwhile, manufacturing conditions in the mid-Atlantic region (http://www.marketwatch.com/story/philly-fed-manufacturing-index-accelerates-in-september-2017-09-21) accelerated in September and suggest an economy picking up steam.

In Europe, the 10-year German bond yield was at 0.457%, compared with 0.440% on Thursday.

(END) Dow Jones Newswires

September 21, 2017 14:56 ET (18:56 GMT)