BOND REPORT: Long-dated Treasury Yields Resume Rise, But Short-dated Bond Yields Trade Lower

By FeaturesDow Jones Newswires

Short-dated Treasury yields edged lower on Tuesday while longer dated yields resumed a climb ahead of an important State of the Union address from President Donald Trump. The moves for U.S. government paper also come as the Federal Reserve is set to kick off its two-day policy meeting with an updated outlook due Wednesday.

How are Treasurys performing?

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The yield on the 10-year Treasury note was up 1 basis point at 2.705%, compared with 2.695% late Monday in New York. The benchmark note's yield rose to a high at 2.727% in the previous session, its highest since April 2014, according to WSJ Market Data Group.

Meanwhile, the 2-year note yield lost 0.6 basis point to 2.116%, versus 2.122%, while the 30-year bond yield ticked up 1 basis point to 2.950%.

Bond prices move inversely to their yields.

What are driving markets?

A rising benchmark 10-year Treasury yield, which is used to price everything from mortgages to car loans, has been attributed to an expected economic boost from corporate tax cuts and other stimulus measures which could prompt the Federal Reserve to raise interest rates at a faster pace than the roughly three or four that the market has previously priced in, undercutting appetite for bonds.

The uptrend in yields for government paper has created some headwinds for a record-setting run in global equities, with the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite Index on pace to fall firmly for a second session in a row (http://www.marketwatch.com/story/dow-futures-slide-150-points-signaling-another-painful-session-2018-01-30).

Richer bond yields can undercut demand for assets perceived as relatively risky like stocks, with investors tending to gravitate to safety of higher-yielding paper.

Some market participants argue that the 30-year bond yield holding below its highest level in 2017 above 3.1%, suggests that investors aren't particularly optimistic about the long-term outlook for the economy, which would otherwise see investors sell longer bonds, driving yields higher.

Later today, President Trump will deliver his first official State of the Union address, which investors will keenly watch for signs of additional fiscal-stimulus measures to come.

On Wednesday, Fed policy makers, in Chairwoman Janet Yellen's last meeting, will offer further details about the central bank's plan for reducing its crisis-era bond portfolio and communicate an updated economic and monetary policy outlook, which tends to have an outsize influence on short-date notes.

What are strategists saying?

"The rise in global bond yields isn't necessarily a bad thing; it reflects the strength of the economic recovery. However, the pace of the rise in yields may create significant headwinds for equities in the days to come, especially if U.S. 10-year yields break above 3%, a very critical [psychological] level in my opinion. A simple question that may come to investors mind, is 'why would I remain in equities when two-year U.S. Treasury bills can provide the same divided yield return of the S&P 500 at 2.12%?,'" wrote Hussein Sayed, chief market strategist at FXTM in a Tuesday research note.

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(END) Dow Jones Newswires

January 30, 2018 08:19 ET (13:19 GMT)

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