BOND REPORT: Treasury Yields See Big September Rise On Hawkish Fed, Trump Tax Push

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

Treasury prices declined Friday, pushing up yields, and capping a sharp September selloff fueled by heightened expectations the Federal Reserve will deliver another rate increase by the end of the year and a Republican tax overhaul that could significantly increase government borrowing.

Continue Reading Below

What did bond yields do?

The benchmark 10-year Treasury yield rose 2 basis points to 2.328% after hitting an 11-week high earlier in the week. For September, the yield increased more than 20 basis points for the largest one-month rise since November. For the quarter, the yield is up 3 basis points.

See:What rose in the third quarter? Stocks, bonds--basically everything (http://www.marketwatch.com/story/what-rose-in-the-third-quarter-stocks-bondsbasically-everything-2017-09-29)

The 2-year note yield , which is more sensitive to official rate expectations, rose 2.4 basis points to 1.479%, contributing to a nearly 15 basis point rise for the month and a 9.4 basis point quarterly increase.

Meanwhile, the 30-year bond yield fell 1 basis point to 2.859%, leaving it up 13.5 basis points for September and 2.5 basis points for the third quarter.

Continue Reading Below

Bond yields move in the opposite direction of prices.

What moved 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.

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.

Also, news emerged Friday that Trump interviewed Fed Gov. Jerome Powell and Kevin Warsh (http://www.marketwatch.com/story/trump-interviewed-fed-gov-powell-for-top-job-at-central-bank---wsj-2017-09-29), a former governor, as candidates to replace Janet Yellen as head of the central bank when her term expires early next year. Warsh is seen by many analysts as more enthusiastic about raising rates than Yellen or other candidates.

See:5 things to know about Kevin Warsh, who may be the next Fed chairman (http://www.marketwatch.com/story/five-things-to-know-about-kevin-warsh-who-may-be-the-next-fed-chairman-2017-09-29)

What are bond traders and strategists saying?

"The stories behind the sharp rise in yields over the last two weeks come from the two so obvious areas it's hard to try and nuance the price action to anything else. There was the [Fed], of course, largely seen as more hawkish (I'd say stubbornly hawkish) in its gentle bias and the administration's rapid move to push for tax reform," said David Ader, chief macro strategist at Informa Financial Intelligence.

"The former hit the front end and flattened the curve; the latter hit further out the curve and steepened it back up," he said, in a note.

Which Federal Reserve speakers were in focus?

Philadelphia Fed President Patrick Harker, in a speech, said he still expects the central bank to raise rates in December (http://www.marketwatch.com/story/feds-harker-expects-to-hike-interest-rates-in-december-2017-09-29).

What other data were on the radar?

Which other assets moved?

The yield for the 10-year German bond , known as the bund, was at 0.462%, down 1.8 basis points. The bund is viewed as a gauge of expectations for the eurozone economic outlook given Germany's role as the region's biggest economy.

(END) Dow Jones Newswires

September 29, 2017 16:39 ET (20:39 GMT)