BOND REPORT: Treasury Yields Bounce Back After Reports Of Bannon Departure From White House

President Donald Trump removes Steve Bannon from position as White House Chief Strategist

Treasury yields climbed back into positive territory on Wednesday afternoon trade after reports that President Donald Trump had forced out Steve Bannon as White House chief strategist.

Market analysts said Bannon's departure could offer relief to a turmoil-ridden White House, which has had to recently contend with the disbanding of Trump's business advisory councils after Trump stirred up controversy when he responded to the violence in Charlottesville, Va.

The 10-year benchmark Treasury yield was up by 1.9 basis point to 2.204%, while the 30-year Treasury bond's yield ticked higher by 1 basis point to 2.785%. The 2-year government bond's yield rose by less than a basis point to 1.305%. Bond prices move inversely to yields.

"There might be relief that the more fractious elements of the White house is contained. To the extent that this might look like a more Republican administration, this could soothe a lot of nerves," said Aaron Kohli, fixed-income strategist for BMO Capital Markets.

Moreover, his departure could lend strength to those who favor a more globalized economy, instead of the isolationist, America-first policies that economists fear will hurt growth expectations. It could also help avert a trade war.

"He favors confrontation with China, he is economically nationalistic. Whether you agree with that or not, replacing him will probably lead to less conflict against trading partners," Kohli said.

Treasury yields were already heading higher before the report after data showed U.S. consumer sentiment index rose to its highest level since January. The University of Michigan consumer-sentiment survey rose to 97.6 in August from 93.4 in July (http://www.marketwatch.com/story/americans-more-gung-ho-about-economy-in-august-consumer-sentiment-survey-shows-2017-08-18)and comes on the heels of retail sales that notched a 7-month high (http://www.marketwatch.com/story/us-retail-sales-soar-in-july-to-7-month-high-2017-08-15).

The 2-year Treasury yield, sensitive to shifts in Fed policy, was on track for end the week roughly where it started, after the Fed issued a set of minutes that were largely interpreted as dovish by market participants. The minutes from the Federal Reserve's July policy meeting showed central bankers were finally beginning to concede that the weakness in inflation might not be transitory, suggesting a more gradual pace of monetary tightening. Consumer prices have remained soft for five straight months since March (http://www.marketwatch.com/story/us-consumer-inflation-remains-soft-in-july-cpi-shows-2017-08-11).

U.S. bond markets were relatively volatile during the week amid political turmoil in the White House and a terrorist attack in Spain.

Much of the week's trading was driven by sharp swings in political uncertainty as a standoff between North Korea and President Donald Trump's administration abated only to give way to the dissolution of Trump's business advisory councils. Support for Trump among his own party has also appeared to waver as several Republican senators and congressmen have condemned Trump's remarks following protests in Charlottesville, Va.

"Enough key players in Congress are stepping away from the shadow cast by the Trump presidency that financial markets are marking down prospects of this president being able to achieve any constructive objectives for tax reform, infrastructure spending or health care reform," said Carl Weinberg, chief economist for High Frequency Economics, in a note to clients.

Bond yields dropped and equities sold off on Thursday in response to a terrorist attack in Barcelona, which left at least 14 people dead and more than a 100 injured after two vans plowed into a crowd in a popular tourist spot.

This increased trading activity in European bond markets on Friday as they attracted a rush of flows from investors fleeing equities into the perceived safety of sovereign paper. The German 10-year government bond's yield fell 1.2 basis point to 0.413%, as the Stoxx Europe 600 index fell 0.7% to 3041.7.

For next week, market participants would gear up for the Federal Reserve symposium in Jackson Hole, Wyo. Both Fed Chairwoman Janet Yellen and European Central Bank President Mario Draghi will attend the get-together. But sources at the ECB said Draghi wouldn't announce a major policy shift as previous rumors had suggested, even as the eurozone's economy makes a broad, steady recovery (http://www.marketwatch.com/story/eurozone-recovery-aided-by-dutch-surge-2017-08-16).

(END) Dow Jones Newswires

August 18, 2017 13:55 ET (17:55 GMT)