BOND REPORT: 10-year Treasury Yield Hits 9-month High As House Hands Baton To Senate For Tax Vote

By FeaturesDow Jones Newswires

10-year Treasury yield pushes above 2.40%, a key psychological level

Treasury prices fell, pushing up yields on Tuesday after the House voted to pass the tax bill, stirring up growth and inflation expectations.

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What are Treasurys doing?

The benchmark 10-year Treasury note yield jumped 7.2 basis points to 2.464%, the highest level since March 20. It also represented the largest single-day gain since Sept. 27.

The two-year note yield rose 2.3 basis points to 1.854%. The 30-year bond yield climbed 7.8 basis points to 2.822%, the biggest single-day climb since Sept. 27.

See: Bond bull market faces 'moment of truth' as 10-year yield crosses 2.40% (http://www.marketwatch.com/story/bond-bull-market-faces-moment-of-truth-as-10-year-yield-crosses-240-2017-10-25)

Bond prices move in the opposite direction of yields.

What's driving markets?

The House passed its version of the tax overhaul Tuesday (http://www.marketwatch.com/story/house-passes-republicans-tax-overhaul-2017-12-19), handing it to the Senate for a vote in the evening. After holdout Republican Sens. Bob Corker, Susan Collins and Mike Lee signaled their support for the bill, market participants have upped the odds of the bill's passage. The legislation has sent long-dated yields higher by stirring up short-term growth and inflation expectations, which can be bearish for bonds.

After peering through the details, some analysts said the final bill has front-loaded the tax benefits and could boost near-term growth more than thought. Economists at BMO Capital Markets raised their 2018 GDP forecast to 2.6% from 2.4% on expectations for a successful tax overhaul.

Read: Here's why the stock market could peak the day Trump signs the tax-cut bill (http://www.marketwatch.com/story/heres-why-the-stock-market-could-peak-the-day-trump-signs-the-tax-cut-bill-2017-12-18)

Also check out: Senate tax vote planned for Tuesday evening, McConnell says (http://www.marketwatch.com/story/senate-tax-vote-planned-for-tuesday-evening-mcconnell-says-2017-12-19)

What did market participants say?

"The fact that the corporate tax break didn't get phased in through to 2019 and will start neatly in 2019, that's very stimulative. That's putting pressure on the bond market and I think that's why we're seeing the steepening yield curve," said Dan Heckman, senior fixed-income strategist at U.S. Bank and Wealth Management. A steepening yield curve refers to when the gap between long-dated yields and short-dated yields widen, and is often seen if investors are pricing in higher growth expectations.

What else is on investors' radar?

Housing starts for November rose 3.3% to an annual 1.297 million, outpacing MarketWatch economists' forecasts for an annual 1.25 million. But building permits fell 1.4% to an annual 1.298 million. That followed a stellar result in the home builder's index for December, which hit an 18-year high of 74 (http://www.marketwatch.com/story/home-builder-confidence-roars-to-an-18-year-high-2017-12-18).

Minneapolis Fed President Neel Kashkari attended a moderated Q&A session in Roseville, Minn, where he said the economy was "better off letting inflation come to us than preemptively cutting off the expansion by raising rates prematurely," Reuters reported (https://www.reuters.com/article/us-usa-fed-kashkari/feds-kashkari-says-should-wait-for-inflation-before-raising-rates-idUSKBN1ED2HR).

On Monday, he said he dissented against raising interest rates in the December Fed policy meeting in part because the gap between short-dated and long-dated yields had narrowed too much, a sign that the economy was nearing a downturn. But some played down the importance of his comments, noting Kashkari won't be a voting member of the Federal Open Market Committee next year.

What other assets are on the move?

European bond yields climbed after Reuters reported (https://www.reuters.com/article/us-ecb-policy/ecb-policymakers-talk-life-after-qe-as-economy-expands-idUSKBN1ED1IT?il=0) that senior officials at the European Central Bank were turning their discussions towards the use of interest rates to control monetary policy, instead of quantitative easing. When the ECB shifts away from asset purchases, it would take away an important pillar of support for bond prices.

The German 10-year government bond yield rose 6.6 basis points to 0.676%, while the French 10-year government bond yield rose 7.4 basis points to 0.700%.

(END) Dow Jones Newswires

December 19, 2017 16:18 ET (21:18 GMT)