BOND REPORT: Buying In Long-dated Treasurys Drive 10-year Yield, 30-year Yield Lower

By Mark DeCambre, MarketWatch , Sunny Oh Features Dow Jones Newswires

Traders in the fed-futures market are pricing close to a 100% chance of another rate increase in December

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Long-dated Treasury yields fell on Tuesday, with short-dated yields holding near a nine-year high, as investors placed fresh bets that the so-called yield curve would flatten, as the outlook for a rate increase in December firms and as inflation expectations for higher inflation are muted.

Traders also listened to comments from prominent central bankers, including Federal Reserve Chairwoman Janet Yellen, European Central Bank President Mario Draghi, Bank of Japan Gov. Haruhiko Kuroda and Bank of England Gov. Mark Carney, who all spoke at a panel discussion in Frankfurt.

What are yields doing?

The 2-year Treasury note yield was at 1.689%, virtually unchanged from its level late Monday in New York (http://www.marketwatch.com/story/treasurys-see-buying-as-brexit-concerns-stoke-demand-for-safe-assets-2017-11-13). The 10-year benchmark Treasury note yield fell 2 basis points to 2.381%, while the 30-year Treasury bond yield slipped 3 basis points to 2.839%.

Bond prices and yields move in opposition.

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What's driving Treasurys?

Wall Street is pricing in a near-certain chance of an interest-rate increase when the Federal Open Market Committee next convenes at Dec. 12-13, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

Those expectations have lifted short-term interest rates--the most sensitive to shifting interest-rate expectations--to their highest level in nearly a decade. However, sluggish levels of inflation and wage growth have weighed on longer-dated Treasurys, more influenced by the inflation outlook because rising prices can chip away at a bonds fixed value.

That has helped flatten the so-called yield curve, which outlines the relationship between a bond's maturities and its yields. When long-dated yields fall, and short-dated yields rise, the narrowing gap gives the curve a more flattened shape.

Investors also have been following developments in Washington tied to tax policy, with bond investors concerned that current proposals might increase the deficit and influence bond issuance.

What are strategists saying?

"Yields across the board were higher [after the wholesale inflation report]. With that, you started to see these flattening trades are taking place, buying the long end, and selling the middle of the curve. You've seen the curve flatten again. The theme here is for the curve to continue to flatten, mainly because we're going to see a number or rate hikes in 2018," said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

Kathy Jones, chief fixed-income strategist for Schwab Center for Financial Research, said what she viewed as healthy wholesale prices could give additional encouragement to the Fed to raise rates in December.

(https://twitter.com/KathyJones/status/930503687448883200)

What else is on investor's radar?

October wholesale prices rose 0.4% (http://www.marketwatch.com/story/us-producer-prices-surge-04-in-october-2017-11-14), higher than the 0.1% rise for the month forecast by economists polled by MarketWatch. But analysts warned that consumer prices and producer prices weren't closely correlated, leaving an element of uncertainty in Wednesday's CPI number. Wall Street traders have been keenly waiting for further clues on the prospects for inflation normalizing closer to an annual rate around 2% that most central banks deem appropriate for a healthy economy.

Raphael Bostic, the president of the Atlanta Fed, said he supported a gradual increase to rates, contingent on the strength of the economy (http://www.marketwatch.com/story/feds-bostic-backs-gradual-rate-hike-path-2017-11-14). Bostic isn't a voting member of the Fed.

San Francisco Fed President Jim Bullard, a nonvoting member, said there was no need to lift interest rates (http://www.marketwatch.com/story/bullard-says-no-need-to-lift-interest-rates-2017-11-14). While, Dallas Fed President Robert Kaplan, a voting member, said he was "actively considering" his support for another rate increase in December.

See: Fed's Yellen: It's confusing with so many voices on the FOMC (http://www.marketwatch.com/story/feds-yellen-its-confusing-with-so-many-voices-on-the-fomc-2017-11-14)

Meanwhile, Mohamed El-Erian is being considered for the No. 2 job at the Federal Reserve, according to a report by The Wall Street Journal (https://www.wsj.com/articles/white-house-considering-nomination-of-mohamed-el-erian-for-federal-reservevice-chair-1510676461). El-Erian is the chief economic adviser at Allianz.

What other assets are on the move?

European growth showed no signs of letting up after the German economy grew at an annualized 3.3% in the third-quarter (http://www.marketwatch.com/story/german-gdp-grows-33-outstripping-forecasts-2017-11-14). The yield of the 10-year German bond was at at 0.395%, compared with 0.413% late Monday in New York.

(END) Dow Jones Newswires

November 14, 2017 16:32 ET (21:32 GMT)