BOND REPORT: Treasury Yields Slightly Lower After Data But Traders Keep Eye On Tax Bill Hiccups

By Sunny Oh Features Dow Jones Newswires

Treasury yields fell on Tuesday after a raft of early economic data appeared to ding the outlook for fourth-quarter growth, but did little to scuttle the chances of an upcoming rate increase this December.

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What are Treasurys doing?

The benchmark 10-year Treasury note yield ticked lower to 2.371%, from 2.379% on late Monday, while the 30-year bond yield fell to 2.756%, from 2.771%. The 2-year note yield rose a basis point to 1.818%, versus 1.810%. Yields and debt prices move in opposite directions.

What's driving markets?

Investors saw a raft of economic data that could take a bite out of fourth-quarter growth. A wider trade deficit and a large fall in the nonmanufacturing index suggested recent growth momentum might be rockier than thought. Weak economic data, nonetheless, could not dislodge expectations of a Dec. 13 rate increase, considered a foregone conclusion.

But most market participants were still watching the progress of Republican tax legislation, a key issue for bond investors. The Republicans ran into roadblocks in their bid to reconcile the Senate and the House versions of the tax bill after the Senate included a corporate alternative minimum tax, or AMT, in contrast to the House bill, which jettisoned AMT for businesses.

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If the final legislation raises deficits, the Treasury Department will have to ramp up issuance of government debt and possibly generate a supply glut, pushing bond prices lower.

See: This is who gets the biggest tax cuts under the Senate's bill (http://www.marketwatch.com/story/this-is-who-gets-the-biggest-tax-cuts-under-the-senates-bill-2017-12-04)

Read: Does corporate America need a tax cut? Here's what every S&P 500 company actually pays in taxes (http://www.marketwatch.com/story/does-corporate-america-need-a-tax-cut-heres-what-every-sp-500-company-actually-pays-in-taxes-2017-12-04)

What did market participants say?

"All cynicism aside, it's difficult to imagine that the corporate AMT problem isn't resolved quickly; after all including the provision would make the tax reform far less relevant. If the GOP's intension is to deliver the first major victory ahead of the midterm elections, this seems like more than just a procedural hiccup," said Ian Lyngen and Aaron Kohli, fixed-income strategists at BMO Capital Markets.

What else is on investors' radar?

The trade deficit for October came in at $48.7 billion (http://www.marketwatch.com/story/us-imports-record-amount-of-goods-from-china-mexico-europe-as-trade-deficit-soars-2017-12-05), higher than the $47.6 forecasted by economists polled by MarketWatch. The sharp increase in the deficit mostly emanated from rising prices for petroleum imports.

The Institute for Supply Management's nonmanufacturing index, a gauge of the service industry's health, fell to 57.4% in November (http://www.marketwatch.com/story/us-businesses-still-growing-rapidly-even-after-tapping-brakes-in-november-ism-finds-2017-12-05). Economists had expected a reading of 59.0%, down from 60.1% in October.

What other assets were on the move?

Bank of Japan Governor Haruhiko Kuroda appeared to back-pedal from his "reversal-rate" theory, which suggests easy monetary policy could have pernicious effects on lending. He said the BOJ needed to stay "extremely" accommodative as inflation is well below the central bank's 2% target, reports said.

The 10-year Japanese government bond yield edged higher to 0.40%, from 0.29% late Friday.

(END) Dow Jones Newswires

December 05, 2017 10:55 ET (15:55 GMT)