10-year Treasury yield climbs past 2.30%
Treasury prices retreated Tuesday, pushing up yields, as a surge in commodities prices helped stoke expectations about inflation, which have suffered amid lackluster economic data.
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The selling of government paper comes ahead of the conclusion of the Federal Reserve's two-day policy meeting on Wednesday, where central bankers could set the market up for the looming normalization of the central bank's balance sheet.
The yield on the 10-year benchmark note climbed 7.5 basis points to 2.328%, while the 30-year bond yield rose 7.9 basis points to 2.912%, as both securities notched their largest one-day jump since March 1. The 2-year note's yield made a more modest gain of 2.5 basis points to 1.390%. Bond prices move inversely to yields.
Long-dated rates steadily climbed throughout the day after a surge in stocks and commodities added to appetite for risk, prompting investors to switch out of assets perceived as havens. Crude prices jumped 3.34% to $47.89 per barrel, the best single-session dollar gain since last December, (http://www.marketwatch.com/story/oil-continues-to-gain-as-opec-raises-hopes-of-market-rebalancing-2017-07-25) after Saudi Arabia and Nigeria vowed to curb its oil exports and limit output. Other industrial metals rose, too.
"It's been a risk-on trade today, oil prices rising sharply, equity markets are showing in a nice rally, too," said Larry Milstein, managing director of Treasurys trading at R.W. Pressprich & Co.
The broad gains in commodities strengthened the outlook for inflation, energizing the day's move towards higher yields as it can corrode the value of bonds' fixed payments. Tepid inflation expectations have kept a lid on long-term yields even as the Federal Reserve has signaled its intention to raise rates further and start reducing its balance sheet this year.
"What's been driving Treasury yields lower is the low inflation environment, so after we saw a pickup in commodities, we've seen a bit of a reversal," said Milstein.
See: Will falling oil prices keep the Fed from hiking rates? (http://www.marketwatch.com/story/will-falling-oil-prices-help-bond-investors-beat-the-fed-2017-06-23)
Although analysts say the Federal Open Market Committee, the Fed's interest-rate setting body, is unlikely to name the start date for the balance sheet tapering on Wednesday, the FOMC could help brace investors for a September announcement by saying it could happen sooner rather than later.
"The expectation is that either on tomorrow or September meeting they'll give a specific date," said Mike Collins, senior investment officer at PGIM fixed income. "Our guess is they won't give a specific date tomorrow. It's prudent to give themselves more flexibility."
Some analysts feel a large price-insensitive buyer leaving the market could drain liquidity, and hurt stock and bond prices. Economists from Goldman Sachs estimated the runoff of the Fed's portfolio could contribute to a roughly 20 basis point jump in the 10-year Treasury yield.
"Shrinking the balance sheet is likely to reverse the portfolio rebalancing effects of quantitative easing--which lowered the market supply and increased the prices of risky assets--on asset prices," wrote Daan Struyven, an economist at Goldman Sachs.
See: Fed to stick to plans for rate hike, balance-sheet selloff this year (http://www.marketwatch.com/story/no-retreat-fed-to-stick-to-plans-for-rate-hike-balance-sheet-selloff-this-year-2017-07-24)
Treasury yields began their day's ascent after a record high reading (http://www.marketwatch.com/story/german-business-sentiment-hits-record-high-in-july-2017-07-25)from a German business sentiment indicator drove the German 10-year benchmark yield, higher, pushing it up 5.6 basis points to 0.566%. U.S. government paper tends to closely follow the movements
The Conference Board reported that consumer confidence index climbed to 121.1 in July from 117.3 in June (http://www.marketwatch.com/story/consumer-confidence-back-near-16-year-high-2017-07-25), beating the median forecast of 116.9 from economists surveyed by MarketWatch. Meanwhile, the Treasury Department conducted a successful auction of 2-year notes.
(END) Dow Jones Newswires
July 25, 2017 16:52 ET (20:52 GMT)