The 10-year Treasury note is coming off its worst weekly drop in 4 months
U.S. Treasury prices fell, pushing up yields, on Monday as investor appetite for assets perceived as havens diminished after Hurricane Irma hit Florida with less force than feared and North Korea refrained from conducting another missile test.
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The 10-year Treasury yield jumped 6.8 basis points to 2.125%, while the 30-year Treasury yield rose 6.2 basis points to 2.739%. Both maturities posted their biggest single-day climb since July 25. The 2-year note notched an even more impressive finish, rising 4.8 basis points to 1.318%, its largest daily increase since April 24. Yields and bond prices move in the opposite direction.
Over the weekend, Hurricane Irma produced less destructive force than had been anticipated, while geopolitical tensions eased somewhat after North Korea failed to conduct another missile test, as some had predicted might happen to mark the anniversary of the country's founding.
So-called risk assets like stocks were drawing bidders, with the Dow Jones Industrial Average and the S&P 500 index closing sharply higher (http://www.marketwatch.com/story/dow-futures-up-more-than-100-points-as-fears-ease-over-hurricane-irma-north-korea-2017-09-11). Meanwhile, gold futures , considered a haven asset, settled lower (http://www.marketwatch.com/story/gold-backs-away-from-one-year-highs-as-tensions-over-north-korea-ease-2017-09-11).
"The market is coming back to a more neutral level," said Tom Tucci, managing director of Treasury trading at CIBC World Markets.
A combination of worries over President Donald Trump's waning pro-growth agenda, rising tensions between the U.S. and Pyongyang and hurricanes swirling in the Atlantic had helped to drive yields, which move inversely to price, lower. The 10-year note, for example, saw its largest weekly drop in more than four months (http://www.marketwatch.com/story/10-year-treasury-yield-hovers-above-key-2-level-2017-09-08).
Still, tensions may return. A U.N. Security Council vote was due Monday that called for further and tougher sanctions on the isolated nation.
Bond investors must balance risk momentarily subsiding against the outlook for a further rate increase in 2017. Expectations had fallen to around 27%, but Wall Street was pricing in the expectation of about 42% on Monday, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
On Friday, William Dudley, the president of the New York Federal Reserve, said havoc wreaked by Hurricanes Harvey and Irma could lift the U.S. economy (http://www.marketwatch.com/story/feds-dudley-says-hurricanes-harvey-irma-to-give-unfortunate-boost-to-us-economy-2017-09-08) in 2018, owing to the rebuilding that will be needed.
The impact of the hurricanes on the U.S. economy could be another factor the Fed uses to determine monetary policy in the short term, though economists said the impact may be too fleeting to alter the Fed's path.
"I would characterize the Fed's approach to this point, erring on the side of transitory," said Bill Northey, chief investment officer for U.S. Bank Private Client Group.
Treasury traders have been mostly focused on stubbornly low inflation amid a batch of data that have so far communicated a mixed outlook of the U.S. economy. Inflation, meanwhile, has been running below the Fed's 2% annual target, which has made some central bankers reluctant to lift rates further for fear of stymieing what may be tepid growth.
It is why bond investors will give a large chunk of their attention to the coming consumer price data on Thursday.
"This week's inflation data are even more important than they normally are in that they will either reassure the Fed as to the validity of its baseline inflation narrative, or create more reason for disquiet," Deutsche Bank strategists led by Stuart Sparks wrote in a note.
A flattening yield curve, where the differential between the rates of short-term notes and longer-term securities, also has raised concerns, since a flattening, or inverted, yield curve suggests economic weakness.
"There is no way the Fed is going to raise policy rates to flatten or invert the curve. This is one reason why, we believe, the Fed pulled forward the timing of its balance sheet reduction from December to September. In doing so, the Fed hopes that some increase in 10-year real yields will create the space for it to continue to raise the funds rate," wrote analysts at TS Lombard led by Chief U.S. Economist Steven Blitz, in a Saturday research note.
The balance-sheet reduction refers to plans for the Fed to shrink its $4.5 trillion asset portfolio, which can act as an additional tightening measure for markets, along with lifting interest rates.
A tepid Treasury auction for 3-year notes kick-started a week that is expected to be see nearly $150 billion in securities, comprising $77 billion in new debt and $71 billion in previously sold issues. Such auctions have a tendency to push yields higher as investors sell bonds to accommodate for the new offerings.
(END) Dow Jones Newswires
September 11, 2017 16:24 ET (20:24 GMT)
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