BOND REPORT: Treasurys Edge Higher Ahead Of Fed Policy Update

By FeaturesDow Jones Newswires

Treasury announces quarterly refunding details

Treasurys flipped between tiny gains and losses Wednesday, leaving yields lower as investors digested the government's first-quarter refunding plans and awaited an update on monetary policy from the Federal Reserve as Janet Yellen presides over her last meeting as chairwoman before handing the reins to her successor, Jerome Powell.

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Yields seesawed after a strong reading on private-sector payrolls ahead of official January jobs data due on Friday and the quarterly refunding details.

How are Treasurys performing?

The 2-year note yield , the most sensitive to changes to monetary policy, was off 0.8 basis point at 2.121%. The yield on the 10-year Treasury note declined 1.1 basis points to 2.71%. The 10-year bond yield has been hanging around the highest level since around April 2014.

The 30-year bond yield retreated to 2.953%, compared with 2.980% late Tuesday, which marked its highest since March 2017.

Bond prices move inversely to their yields.

What is driving the market?

ADP said the U.S. economy added 234,000 private-sector jobs (http://www.marketwatch.com/story/us-adds-234000-private-sector-jobs-in-january-adp-says-2018-01-31) in January versus expectations by economists for 185,000. Traders look to the data for clues to official jobs data, though economists note the ADP figures have a mixed record in anticipating the private-sector portion of the Labor Department jobs tally.

The Treasury Department said it plans to increase the size of this quarter's bond and note auctions by $42 billion (http://www.marketwatch.com/story/treasury-says-it-will-issue-additional-42-billion-of-new-bonds-notes-this-quarter-2018-01-31) to meet increased funding needs. Treasury said that it would only be able to fund the government through the end of February unless Congress raises the debt ceiling. Treasury will increase the size of 2-year and 3-year note auctions by $2 billion a month this quarter. In addition, Treasury will increase the auction sizes to each of the next offerings of 5-year, 7-year, 10-year notes and the 30-year bond auctions starting in February.

Signs that the Fed (http://www.marketwatch.com/story/fed-to-take-a-step-toward-a-march-interest-rate-hike-2018-01-26), which will release its updated policy statement at 2 p.m. Eastern Time, is adopting a more aggressive posture to ending easy-money policies and dial up interest rates, could have a chilling effect on bond purchases and stocks, which have been sensitive to the prospect of a rapid rise in borrowing costs.

Moreover, Wall Street investors will closely watch the central bank's language around stubbornly low inflation, which has hung around the Fed's 2% annual target, and the legislative influence of President Donald Trump's administration on the sluggish dollar and the highflying Dow Jones Industrial Average and S&P 500 index . Some analysts attributed a two-day pullback in equities (http://www.marketwatch.com/story/dow-set-to-stabilize-after-shedding-540-points-in-2-days-2018-01-31) partly to the rise in yields, which can lure funds away from risk assets.

What are strategists saying?

"The shorter-dated bond yields have already being climbing noticeably for weeks with the 10-year note rising to its best level since April 2014 and the yield on the two-year note hitting a nine-year high. Market participants probably expect to see a pickup in global growth, and in turn inflation, which should see the major central banks, including the Federal Reserve, turn more hawkish," said Fawad Razaqzada, market analyst at Forex.com, in a Wednesday research note.

"The Fed has already started to shrink it huge $4.5 trillion balance sheet, while the other major central banks have all dropped their dovish stances. As concerns rise over receding monetary support from central banks," he said.

"The debt limit continues to constrain Treasury's flexibility in financing and they urge Congress to raise the debt ceiling as soon as possible. Treasury continues to expect that they can fund the government through the end of January. The increases in coupon supply will eat into available borrowing authority and will further limit bill issuance until the debt ceiling is raised," said Thomas Simons, senior money market economist at Jefferies, in a note.

What other data are in focus?

What other assets are in focus?

The German 10-year government bond , known as the bund, was at 0.669%, compared with 0.693%, according to FactSet data. Yields in the eurozone have been mostly rising along with the U.S. bond yields amid what has been described as a global, synchronized economic improvement, marked by a tapering of quantitative-easing measures by the European Central Bank.

(END) Dow Jones Newswires

January 31, 2018 09:41 ET (14:41 GMT)

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