BOND REPORT: 10-year Treasury Yield Settles At 3-year High As Shutdown Fears Weigh On Bonds

Yields on rise as investors weigh government shutdown threat

Treasury yields rose on Friday even as investors watched Washington drama that could culminate in the first government shutdown in five years as the Senate prepares to take up a short-term spending bill. For the week, however, a rise in yields was supported by further signs of rising inflation.

What did Treasurys do?

The yield on the benchmark 10-year Treasury note climbed 2.8 basis points to 2.639%, its highest close since July 2014, according to WSJ Market Data. The yield for the benchmark maturity rose 8.7 basis points this week.

The 2-year note yield was up 1.5 basis points to 2.058%, contributing to a 5.7 basis point increase for the week.

The 30-year bond yield rose 2.5 basis points to 2.913%, extending a 5.8 basis point weeklong climb.

Bond prices move inversely to yields.

What drove markets?

Market participants said the chances of a stopgap spending bill clearing the Senate has diminished amid growing tensions between the Democrats and Republicans. If lawmakers don't pass the bill by Friday, the government will go into a partial shutdown this weekend. The Senate is set to put the short-term spending measure to a vote (http://www.marketwatch.com/story/republicans-appear-to-have-house-votes-for-funding-bill-but-shutdown-still-looms-2018-01-18) after the House passed the bill on Thursday.

See:A government shutdown 'could reintroduce investors to the fact that markets go down' (http://www.marketwatch.com/story/a-government-shutdown-could-reintroduce-investors-to-the-fact-that-markets-go-down-2018-01-19)

Also read: This is what happens in the stock market when the government shuts down (http://www.marketwatch.com/story/heres-how-the-stock-market-has-handled-past-government-shutdowns-2018-01-16)

The political uncertainty roiled the bond market, pushing prices lower and driving the 10-year note yield above the 2.60% threshold, a key psychological threshold. But rising Treasury yields also reflect concerns about strengthening global growth and the improving inflation prospects. One market based measure of inflation expectations (http://www.marketwatch.com/story/inflation-expectations-touch-3-year-high-after-bond-auction-2018-01-18)surged to 2.09% on Thursday, a three-year high.

Tight labor markets, higher housing costs and reports of wage hikes in the Federal Reserve's Beige Book have underlined the economic specter of inflation may be due for a comeback. Stronger price pressures erodes the value and returns of Treasurys by undermining the purchasing power of its income.

What were market participants saying?

"The economy remains in solid shape, and a protracted shutdown would need to occur before growth would be significantly affected. Market reactions generally have been muted to these events in the past," said Craig Holke, investment strategy analyst for Wells Fargo Investment Institute.

"It stands to reason that would be seeing some cyclical pressure on bond yields, especially given the overwhelming giddiness on the stock market and the economy," said David Rosenberg, chief economist for Gluskin Sheff.

What else was on investors' radar?

The White House is considering San Francisco Fed President John Williams for vice chairman (http://www.marketwatch.com/story/san-francisco-fed-president-john-williams-is-up-for-no-2-fed-post-report-2018-01-18) of the Fed's Board of Governors, news reports said.

(END) Dow Jones Newswires

January 19, 2018 16:48 ET (21:48 GMT)