BOND REPORT: 2-year Treasury Yield Notches 52-week High, But Fed Draws Mostly Muted Response

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

Fed signals that the economy is 'solid' but inflation 'remained soft'

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U.S. Treasurys on Wednesday experienced a muted reaction to the Federal Reserve's updated policy statement, which suggested that the central bank remains on track to raise interest rates once more in December. Long-dated Treasury yields pared modest declines following an update to the U.S. Treasury Department's quarterly refundings, which didn't mention issuing ultralong bonds.

Treasury Secretary Steven Mnuchin has been promoting issuing bonds with maturities at 50-years or 100-years, which might have put pressure on 10-year and 30-year Treasurys.

Where are Treasury yields?

The 10-year Treasury yield ended 0.4 basis point higher at 2.378%, compared with 2.374% late Tuesday, while the 30-year bond was down 0.8 basis point at 2.865%, compared with 2.873% in the previous session. Yields in the so-called long bond have fallen for four consecutive trading sessions.

The 2-year yield , the most sensitive to interest rates shifts, rose 2.8 basis points to 1.620%, marking a 52-week high for the yield, according to WSJ Market Data Group, compared with 1.592% on Tuesday.

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Read: Fed statement may have treats for the hawks and the doves (http://www.marketwatch.com/story/fed-statement-may-have-treats-for-both-hawks-and-doves-2017-10-27)

Bond prices move inversely to yields.

What's driving the market?

The Fed kept benchmark interest rates (http://www.marketwatch.com/story/fed-calls-us-economy-solid-december-rate-hike-still-on-track-2017-11-01) unchanged at a range between 1% and 1.25%, as expected, but called the U.S. economy "solid." However, the U.S. central bank run by Chairwoman Janet Yellen acknowledged that core inflation "remained soft," running below the central bank's 2% annual target. Core inflation, which strips out volatile food and energy prices, fell from 1.4% in July to 1.3% in September, and remains well below the Fed's 2% target.

The Federal Open Market Committee next meets Dec. 12-13, where it is widely expected to lift rates.

Perhaps overshadowing the Fed policy update, investors anticipate that former Fed Gov. Jerome Powell could be named head of the U.S. central bank as early as Thursday to replace Yellen when her term ends in February. Powell is perceived as a nominee that would be less aggressive about raising interest rates than other potential candidates, and one who would favor further deregulation of the banking sector.

Meanwhile, the U.S. Treasury Department during its so-called quarterly refunding announcement didn't reference ultralong bonds, but did say it would hold longer-term bond auctions at $62 billion. Treasury said it expects an increase in coupons in February to meet its 2018 obligations.

Mnuchin, who has championed superlong bonds as a way to fund the government, signaled earlier this week that appetite for such instruments was cool (http://www.marketwatch.com/(S(o54cffqhipqemynavg0qd455))/story/mnuchin-says-treasyrt-did-not-find-a-lot-of-demand-for-ultra-long-bonds-report-2017-10-30). A failure to signal that a new batch of bonds that might compete with 10-year and 30-year debt, briefly offered a bid to Treasurys on the longer end of the curve.

What are strategists saying?

"The Fed could have talked up some of the stronger data and made a stronger case for the December move, instead they didn't underscore the positives and they did continue to note that inflation has continued to decline this year," said Robert Tipp, chief investment strategist at Prudential Fixed Income.

"Given that they have signaled the December move in [their interest-rate projections], you could see this statement is supporting the December but not locking in that hike," Tipp said.

"On balance, this was a pretty benign statement indicating that the Fed remains on track for further removal of policy accommodation. A December rate hike appears to be almost certain at this point, but the outlook beyond 2017 could be dependent on who the president nominates for the next Fed Chair tomorrow," wrote Charlie Ripley, strategist at Allianz Investment Management, in a Wednesday research note.

Ward McCarthy chief financial economist at Jefferies said the reaction of long-dated bonds to the Treasury Department announcement earlier "was just a sigh of a relief that there isn't going to be an ultralong bond on the long end of the curve."

Read:What investors need to know about Fed candidate John Taylor's famous rule (http://www.marketwatch.com/story/what-investors-need-to-know-about-john-taylor-and-the-fed-candidates-famous-rule-2017-10-17)

Also read: Yellen says Fed should be 'wary' of raising rates 'too gradually' (http://www.marketwatch.com/story/yellen-says-fed-should-be-wary-of-raising-rates-too-gradually-2017-09-26)

What data are in focus?

What are other assets doing? Equities across the world are mostly climbing, highlighting an uptrend in global economic growth and luring investors out of the safety of bonds and into assets perceived as riskier like stocks. Notably, the Dow Jones Industrial Average , the S&P 500 index and the Nasdaq Composite Index set fresh all-time intraday records early Wednesday, but has since retreated somewhat (http://www.marketwatch.com/story/sp-dow-poised-for-fresh-records-at-open-as-investors-take-heart-from-earnings-2017-11-01).

The yield on the 10-year German bond , known as the bund, was at 0.371%, compared with 0.370%, according to FactSet data.

(END) Dow Jones Newswires

November 01, 2017 16:08 ET (20:08 GMT)