BOND REPORT: Treasury Yields Edge Higher, On Track For Big Monthly Rise

By William Watts and Mark DeCambre, MarketWatch Features Dow Jones Newswires

Treasurys yields turned higher Friday, and were on track to log a big monthly rise as investors wrestle with prospects for a proposed U.S. tax overhaul and the Federal Reserve's commitment to normalize monetary policy despite signs of sluggish inflation.

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What are bond yields doing?

The benchmark 10-year Treasury yield rose 1.3 basis points to 2.321% after hitting an 11-week high earlier in the week. The shorter-dated 2-year note yield rose 0.8 basis point to 1.463%. Meanwhile, the 30-year bond yield was off slightly at 2.868%

Bond yields move in the opposite direction of prices.

What is moving markets?

The personal-consumption expenditure, or PCE deflator, the Federal Reserve's preferred inflation gauge, increased 0.1% in August (http://www.marketwatch.com/story/fewer-auto-sales-dent-consumer-spending-in-august-inflation-still-weak-pce-shows-2017-09-29), while the closely followed core rate, which strips out food and energy, edged up by the same amount. Both measures were flat on a year-over-year basis.

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Consumer spending rose just 0.1% in August after a 0.3% rise in July, matching expectations. Personal income climbed 0.2% versus a forecast of 0.1%.

President Donald Trump's tax proposal continues to dominate discussion, with members of the administration emphasizing that a proposed cut in the corporate income-tax rate to 20% isn't negotiable.

What are bond traders and strategists saying?

The PCE deflator trend, if sustained, points to a 1% year-over-year inflation rate, well below the Fed's 2% annual target. But Fed Chairwoman Janet Yellen has made clear she thinks core numbers have been held down by temporary factors and fears upward pressure from a tightening labor market, noted Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note.

"We reckon a December rate hike is just about a done deal, but further increases will depend on the data over the next few months proving Dr. Yellen right," he said. "We think that's a decent bet."

Strategists at Barclays led by Jason Goldberg in a Friday research note point out that the so-called term premium between 2-year and 10-year government bonds are at the widest in about 5 weeks. A wider spread between those maturities is often seen as a bullish indicator for financial companies, which borrow on a short-term basis and lend on a longer-term basis.

Which Federal Reserve speakers are in focus?

Philadelphia Fed President Patrick Harker was set to give a speech at 11 a.m. Eastern on the economic outlook as well as on fintech at a conference at his regional bank.

What other data are investors watching?

Which other assets are moving?

The yield for the 10-year German bond , known as the bund, was at 0.469%, down 1 basis point. The sovereign paper is viewed as a gauge of the health of the European economy, because Germany is the largest eurozone economy.

(END) Dow Jones Newswires

September 29, 2017 11:01 ET (15:01 GMT)