BOND REPORT: Treasury Yields Rise As Roadblock To Tax Bill Removed

By Sunny Oh Features Dow Jones Newswires

Treasury yields rose on Friday after last-minute changes to tax-cut legislation helped placate concerns voiced by Republican senators, taking away a potential obstacle. Investors awaited the final version of the legislation, which is set for unveiling later in the day.

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What are Treasurys doing?

The 10-year benchmark Treasury yield rose to 2.368%, from 2.346% on late Thursday. The 2-year note yield climbed to 1.848%, a decade high, versus 1.811%. The 30-year bond yield was down to 2.703%, versus 2.710%.

Debt prices move in the opposite direction of yields.

What's driving markets?

The push to pass the Republican tax bill received a boost after lawmakers agreed to an expanded child tax credit (http://www.marketwatch.com/story/heres-whats-in-the-republican-tax-deal-2017-12-13) to placate the demands of Sens. Marco Rubio, R-Fla., and Sen. Mike Lee, R-Utah, who had appeared to stymie the legislation's progress (http://www.marketwatch.com/story/rubio-a-no-on-tax-bill-without-larger-expansion-of-child-tax-credit-report-2017-12-14).

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Republicans are expected to unveil the final bill on Friday and vote next week, leaving President Donald Trump to sign it into law. But even as the tax cuts come closer to fruition, bond markets have been tame compared with the earlier selloff seen following Trump's election victory in November 2016, when expectation for pro-growth fiscal policy catapulted long-term bond yields.

Analysts nonetheless have shown trepidation over the bill's potential impact on yields. A deficit-widening tax cut would push the federal government to increase debt issuance, a move that would introduce competing debt on to the market, undercutting demand for existing issues.

What did strategist say?

"Interest rates also seem underwhelmed by the 2018 impact of the tax bill. Whatever grade you assign to the end result, the bond market and economists are adding an extra 'minus' to the grade. So, if you think it's a 'B' effort, the market's grade is a 'B minus.' Rate trajectory is well below what we charted for getting this close to the goal line, partly due to the Byzantine compromises traded in exchange for something that resembles revenue neutrality versus a 10-year measuring period," said Jim Vogel, an interest-rate strategist at FTN Financial.

What else is on investors' radar?

Industrial production for November rose 0.2%, the third monthly advance in a row. Economists surveyed by MarketWatch had forecast an 0.4% gain. The Empire State manufacturing index, a gauge of local economic activity, slipped to 18 (http://www.marketwatch.com/story/empire-state-index-slips-for-third-month-in-december-2017-12-15).

What other assets are on the move?

Portuguese bond yields fell in anticipation of a Fitch Ratings upgrade of the country's debt rating, which would lift it to investment-grade status. This follows S&P Global's decision to raise the country's rating out of so-called junk territory on Sept. 15. The 10-year Portuguese bond yield fell to 1.798%, while the German 10-year bond yield stood at 0.301%.

(END) Dow Jones Newswires

December 15, 2017 13:29 ET (18:29 GMT)