BOND REPORT: Treasury Yield Curve Resumes Flattening After Industrial Production Data

By FeaturesDow Jones Newswires

Long-dated Treasury yields fell, while short-dated yields rose, after a strong reading on industrial production Wednesday underlined expectations the Federal Reserve will raise interest rates more aggressively this year.

What are yields doing?

Continue Reading Below

The yield on the benchmark 10-year U.S. Treasury note was mostly flat at 2.552%, while the yield on the 30-year bond fell 1.3 basis point to 2.822%.

The yield on the 2-year note , sensitive to shifting expectations for central bank policy, rose 2.5 basis points to 2.043%. Yields and Treasury prices move in opposite directions.

What's driving the market?

The focus remains on the Federal Reserve, with the 2-year yield, the most sensitive to interest-rate expectations, last week topping 2% for the first time since 2008 on growing anticipation the central bank will deliver a series of rate increases this year. A solid reading for industrial production showed a U.S. economy continues to run strong, a factor that could give the central bank reason to raise rates at a swifter pace if data, most importantly inflation, continues to improve.

Stronger rate increase expectations helped to flatten the yield curve, a measure of the difference between long-dated and short-dated yields. A flatter yield curve can serve as a red alarm for growth prospects, reflecting concerns that the Fed is willing to tighten monetary policy faster than long-term economic conditions might warrant.

Dallas Fed President Robert Kaplan said there could be more than three rate increases in 2018 (https://www.wsj.com/articles/feds-kaplan-expects-3-rate-rises-this-year-but-says-more-may-be-needed-1516183201). Chicago Fed President Charles Evans is set to speak at 3 p.m. Eastern, followed by Cleveland Fed President Loretta Mester at 4:30 p.m.

Worries remain over the potential for a government shutdown at the end of the week unless lawmakers and the White House come to an agreement. House Republicans released a short-term spending bill on Tuesday to avert a government shutdown on Friday. But the bill precluded details of an immigration deal seen as key to earning Democrats' support.

See: Here's how the stock market has handled past government shutdowns (http://www.marketwatch.com/story/heres-how-the-stock-market-has-handled-past-government-shutdowns-2018-01-16)

What are analysts saying?

"The US government shutdown tango is back on the front burner with its full complement of bravado, accusations, and intrigue. It looks like House Republicans are trying to get another can kicking done by taking the immigration issue off the table for the Friday deadline," said Arnim Holzer, strategist for EAB Investment Group.

"Our flattening view is playing out largely as expected, we've been a bit surprised by the persistence of yields especially in the 10-year part of the curve over 2.5%. In parsing out the rationale behind the moves, we've focused on the improvement in inflation expectations in the Treasury inflation-protected securities market as helping keep [the 10-year yield] lofty," wrote Aaron Kohli, fixed-income strategist for BMO Capital Markets.

What else is on investors' radar?

The economic calendar was light, but Wednesday does feature the Fed's so-called beige book, a roundup of economic anecdotes gathered by regional Fed banks. The beige book report is set for release at 2 p.m.

December industrial production jumped 0.9% in December, above the 0.6% MarketWatch forecast, up from 0.2% in December. This marked the fourth straight monthly increase since August. Capacity utilization, a measure of manufacturing slack, rose to 77.9% in December (http://www.marketwatch.com/story/industrial-output-jumps-09-in-december-for-the-fourth-straight-monthly-gain-2018-01-17), the highest rate since February 2015.

What other assets are in focus?

Yields for eurozone government bonds ticked lower after policy makers from the European Central Bank, including Vitor Costancio, opened the door for ultraloose monetary policy to stay in place for a longer time. The 10-year German bond yield , often used as a proxy for the broader eurozone economy, was down a basis point at 0.487%, according to Tradeweb.

(END) Dow Jones Newswires

January 17, 2018 12:00 ET (17:00 GMT)

Continue Reading Below