BOND REPORT: Treasurys Fall As Spanish Tensions Flare Up And Report Trump Favors Powell

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

Spanish lawmakers pass article 155, suspending autonomy of Catalan government

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U.S. Treasury prices rose, pulling yields lower, on Friday trade amid spiking tensions on the Iberian Peninsula and a news report indicating that President Donald Trump is leaning toward Federal Reserve Gov. Jerome Powell as the next head of the U.S. central bank.

What are yields doing?

The yield on the 10-year Treasury note was at 2.425%, compared with 2.452% late Thursday in New York. The 2-year Treasury yield stood at 1.580%, versus 1.618% in the previous session, while the 30-year Treasury bond yield traded at 2.935%, compared with 2.959% late Thursday.

Bond prices move inversely to yields.

What's driving the market?

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News reports suggested Trump was favoring Powell as the next Fed chief. Investors continue to weigh the prospect of a replacement for Fed Chairwoman Janet Yellen, whose term ends in February and who appears to be out of the running for the top spot. Front-runners are said to be Stanford economist John Taylor, who is seen as likely to take a hawkish approach and Powell, who is viewed as a monetary dove and similar to Yellen.

See: Trump leaning toward appointing Powell to Fed: report (http://www.marketwatch.com/story/trump-leaning-toward-appointing-powell-to-fed-report-2017-10-27)

Read: What a Jerome Powell-led Fed may look like (http://www.marketwatch.com/story/imagining-life-under-a-jerome-powell-fed-2017-10-20)

Tensions from the Catalan Peninsula escalated after the Catalan Parliament voted to declare independence from Spain, drawing investors into assets perceived as safe like U.S. government paper and Japanese yen. Then, Spanish lawmakers approved article 155, which would institute direct rule and suspend the autonomy of the Catalan President. The concern is that Catalonia's secession would spark a domino of separatist movements across the European Union, threatening the territorial integrity of their member states and their shared economy.

What are strategist saying?

"The Treasury market is shrugging off the data and is focusing primarily on Fed Chair appointment where rumors continue to be that Powell will get appointed. He is less hawkish than other names that have surfaced hence the bid in the market," wrote Tom di Galoma, managing director of Treasurys trading for Seaport Global Securities.

"With the economy growing much faster than potential and the output gap already closed, the Fed has little reason not to raise rates in December," said Sal Guatieri, senior economist for BMO Capital Markets, referring to the absence of slack in the U.S. economy.

What else is on radar of investors?

The first read of third-quarter gross domestic product showed annualized growth of 3%, outpacing the median forecast of 2.4% produced by a MarketWatch survey of analysts. Much of this rise was driven by business investment and growth in inventories, which contributed 0.7% to the number alone. That was a source of concern to some as inventories can either suggest heightened optimism among businesses or that firms were having difficulty off-loading their merchandise.

It represents the last major piece of economic data before the Federal Reserve's policy-setting meeting next week. Investors anticipate the data will give the central bank assurance that the world's largest economy could withstand one more increase to rates at its December meeting. Traders at the fed-futures market priced in a 96.7% chance of a rate increase, CME Group data show (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/).

See: GDP grows at stronger-than-forecast 3% rate in third quarter (http://www.marketwatch.com/story/economy-grows-at-3-rate-in-third-quarter-despite-negative-impact-from-hurricanes-2017-10-27)

Which other assets are moving?

Spanish 10-year bond yields hit an intraday high of 1.615%, before coming down to 1.569%, after the political turmoil developing in Spain.

Global stocks rose, with the S&P 500 index and the Nasdaq Composite Index rising on the back of a solid round of quarterly earnings from some of the U.S.'s biggest technology companies (http://www.marketwatch.com/story/amazon-google-microsoft-and-intel-find-billions-more-in-profit-2017-10-26).

(END) Dow Jones Newswires

October 27, 2017 11:00 ET (15:00 GMT)