BOND REPORT: 2-year Treasury Yield Hovers Near 9-year Peak As Wall Street Braces For Higher Rates

Traders in the fed futures market are pricing close to a 90% chance of another quarter percentage point rate increase in December

Long-dated Treasury yields fell on Tuesday, with short-dated yields holding near a nine-year high, suggesting that the outlook for a rate increase in coming weeks from the Federal Reserve has firmed for investors.

Traders also listened to comments from prominent central bankers, including Fed Chairwoman Janet Yellen, European Central Bank President Mario Draghi, Bank of Japan Gov. Haruhiko Kuroda and Bank of England Gov. Mark Carney, who all spoke at a panel discussion in Frankfurt.

What are yields doing?

The 2-year Treasury note yield was at 1.691%, virtually unchanged from its level late Monday in New York (http://www.marketwatch.com/story/treasurys-see-buying-as-brexit-concerns-stoke-demand-for-safe-assets-2017-11-13). The 10-year benchmark Treasury note yield was at 2.387%, versus 2.400% in the previous session, while the 30-year Treasury yield slipped 2.6 basis points to 2.843%, falling slightly compared with 2.869%.

Bond prices and yields move in opposition.

What's driving Treasurys?

Wall Street is pricing in a near-certain chance of an interest-rate increase when the Federal Open Market Committee next convenes at Dec. 12-13, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

Those expectations have lifted short-term interest rates--the most sensitive to shifting interest-rate expectations--to their highest level in nearly a decade. However, sluggish levels of inflation and wage growth have weighed on longer-dated Treasurys, more influenced by the inflation outlook because rising prices can chip away at a bonds fixed value.

That has helped flatten the so-called yield curve, which outlines the relationship between a bond's maturities and its yields. When long-dated yields fall, and short-dated yields rise, the narrowing gap gives the curve a more flattened shape.

Investors also have been following developments in Washington tied to tax policy, with bond investors concerned that current proposals might increase the deficit and influence bond issuance.

Outgoing Fed boss Yellen said valuations for stocks are near historic highs, attributing elevated levels for stocks to the ultralow rate environment, speaking in Frankfurt. President Donald Trump nominated Fed. Gov. Jerome Powell to replace Yellen when her term as Fed chief expires in February.

Meanwhile, Mohamed El-Erian is being considered for the No. 2 job at the Federal Reserve, according to a report by The Wall Street Journal (https://www.wsj.com/articles/white-house-considering-nomination-of-mohamed-el-erian-for-federal-reservevice-chair-1510676461). El-Erian, the chief economic adviser at Allianz Global Advisers.

See: Fed's Yellen: It's confusing with so many voices on the FOMC (http://www.marketwatch.com/story/feds-yellen-its-confusing-with-so-many-voices-on-the-fomc-2017-11-14)

What are strategists saying?

"Yields across the board were higher [after the wholesale inflation report]. With that, you started to see these flattening trades are taking place, buying the long end, and selling the middle of the curve. You've seen the curve flatten again. The theme here is for the curve to continue to flatten, mainly because we're going to see a number or rate hikes in 2018," said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

What else is on investor's radar?

October wholesale prices rose 0.4% (http://www.marketwatch.com/story/us-producer-prices-surge-04-in-october-2017-11-14), higher than the 0.1% rise for the month forecast by economists polled by MarketWatch. But analysts warned that consumer prices and producer prices weren't closely correlated, leaving an element of uncertainty in Wednesday's CPI number. Wall Street traders have been keenly waiting for further clues on the prospects for inflation normalizing closer to an annual rate around 2% that most central banks deem appropriate for a healthy economy.

Investors are also watching a parade of Fed speakers this week, highlighted by Yellen, as well as Raphael Bostic, the new president of the Atlanta Fed. San Francisco Fed President Jim Bullard, a nonvoting member, said there was no need to lift interest rates (http://www.marketwatch.com/story/bullard-says-no-need-to-lift-interest-rates-2017-11-14). While, Dallas Fed President Robert Kaplan, voting member, said he was "actively considering" his support for another rate increase in December.

European growth showed no signs of letting up after the German economy grew at an annualized 3.3% in the third-quarter (http://www.marketwatch.com/story/german-gdp-grows-33-outstripping-forecasts-2017-11-14). The yield of the 10-year German bond was at at 0.395%, compared with 0.413% late Monday in New York.

Read: Here are the seven Fed speeches that matter this week (http://www.marketwatch.com/story/here-are-the-seven-fed-speeches-that-matter-this-week-2017-11-13)

(END) Dow Jones Newswires

November 14, 2017 11:58 ET (16:58 GMT)