BOND REPORT: Treasury Yields Rise Along With Stocks After House Passes Tax Bill

By William Watts, MarketWatch Features Dow Jones Newswires

Curve-flattening pauses but still perplexes participants

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Treasurys pulled back Thursday, pushing up yields as equities rebounded after the House passed its version of the tax bill, putting the Republicans one step closer to the $1.4 trillion tax cut they want enacted.

What are yields doing?

The yield on the benchmark 10-year Treasury note rose 2.7 basis points to 2.361%, while the yield on the 30-year Treasury bond added 2.3 basis points to 2.804%.

The two-year yield was up by 2.5 basis points to 1.712%, another fresh 10-year high. The shorter-dated Treasury has notched a spree of records since early September.

Yields rise as bond prices fall.

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What's driving the market?

Yields were on the rise amid a firmer tone in equity markets, with U.S. stocks retracing all their losses a day after the Dow Jones Industrial Average posted a 138-point drop. Weakness in global equities had spurred demand for haven assets like Treasurys, but that flight to quality reversed Thursday. The surge in stocks gained momentum after the passage of the House's tax overhaul.

On the other hand, bondholders fear if the tax cuts are not accompanied by countervailing measures elsewhere in the bill, the resulting deficits will drive issuance and bond yields higher.

See: House passes tax overhaul as spotlight turns to Senate (http://www.marketwatch.com/story/house-passes-tax-overhaul-as-spotlight-turns-to-senate-2017-11-16)

The yield curve, a line that plots yields across all maturities, also steepened modestly Thursday but has been in flattening mode for weeks, with yields at the short end rising in anticipation of Federal Reserve rate increases, while a dearth of inflation has been cited as a potential reason for pressure on longer-dated yields.

The spread between two- and 10-year yields, a key measure of the curve, hit a decade low of 63 basis points, or 0.63 percentage points, on Wednesday, noted Hussein Sayed, chief market strategist at FXTM, while the spread between five- and 10-year yields fell below 30 basis points for the first time since 2007.

What are analysts saying?

"The last two days, interest rates have been predictably tied to stocks. Key word = predictable," wrote Jim Vogel, analyst at FTN Financial, in a note. "The process of cutting taxes within a budget is anything but smooth, so there's reassurance in the rhythm of Treasury movements this week."

"The string of positive economic data will keep the Fed on a one-way path to a December 13th hike," said Jennifer Lee, senior economist at BMO Capital Markets.

What's on the economic calendar?

Industrial production climbed 0.9% in October (http://www.marketwatch.com/story/industrial-production-surges-in-october-tops-forecast-2017-11-16). Economists polled by MarketWatch had forecast a 0.6% gain. In the same month, import prices rose 0.2% (http://www.marketwatch.com/story/price-surge-in-imported-goods-slows-in-october-2017-11-16). Weekly jobless claims rose 10,000 to 249,000 for the week ending Nov. 11, a six-week high (http://www.marketwatch.com/story/us-jobless-claims-jump-to-6-week-high-2017-11-16).

On the speaking circuit, Cleveland Fed President Loretta Mester said with inflation moving in the right direction, the central bank should stick to a gradual rate-hike path. She also said the Fed's low-rate policy was not undermining financial stability by encouraging "excessive risk taking."

Read: Feldstein warns $9.5 trillion of stock market value at risk from loose Fed policy (http://www.marketwatch.com/story/harvard-economist-feldstein-sees-greater-chance-stocks-will-plunge-2017-11-16)

What are other assets doing?

All three major U.S. equity indexes bounced back after two straight days of losses. The Dow Jones Industrial Average , the S&P 500 and the Nasdaq Composite Index all rose more than 0.8%. The Japanese Nikkei Stock Average was up by 1.5%.

(END) Dow Jones Newswires

November 16, 2017 16:29 ET (21:29 GMT)