BOND REPORT: Treasury Yields Edge Higher, On Track For Big Monthly Rise

By William Watts and Mark DeCambre, MarketWatchFeaturesDow Jones Newswires

Treasurys yields turned higher Friday, and were on track to log a big monthly rise as investors wrestle with prospects for a proposed U.S. tax overhaul and the Federal Reserve's commitment to normalize monetary policy despite signs of sluggish inflation.

What are bond yields doing?

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The benchmark 10-year Treasury yield rose 1.3 basis points to 2.321% after hitting an 11-week high earlier in the week. The shorter-dated 2-year note yield rose 0.8 basis point to 1.463%. Meanwhile, the 30-year bond yield was off slightly at 2.868%

Bond yields move in the opposite direction of prices.

What is moving markets?

The personal-consumption expenditure, or PCE deflator, the Federal Reserve's preferred inflation gauge, increased 0.1% in August (http://www.marketwatch.com/story/fewer-auto-sales-dent-consumer-spending-in-august-inflation-still-weak-pce-shows-2017-09-29), while the closely followed core rate, which strips out food and energy, edged up by the same amount. Both measures were flat on a year-over-year basis.

Consumer spending rose just 0.1% in August after a 0.3% rise in July, matching expectations. Personal income climbed 0.2% versus a forecast of 0.1%.

President Donald Trump's tax proposal continues to dominate discussion, with members of the administration emphasizing that a proposed cut in the corporate income-tax rate to 20% isn't negotiable.

What are bond traders and strategists saying?

The PCE deflator trend, if sustained, points to a 1% year-over-year inflation rate, well below the Fed's 2% annual target. But Fed Chairwoman Janet Yellen has made clear she thinks core numbers have been held down by temporary factors and fears upward pressure from a tightening labor market, noted Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note.

"We reckon a December rate hike is just about a done deal, but further increases will depend on the data over the next few months proving Dr. Yellen right," he said. "We think that's a decent bet."

Strategists at Barclays led by Jason Goldberg in a Friday research note point out that the so-called term premium between 2-year and 10-year government bonds are at the widest in about 5 weeks. A wider spread between those maturities is often seen as a bullish indicator for financial companies, which borrow on a short-term basis and lend on a longer-term basis.

Which Federal Reserve speakers are in focus?

Philadelphia Fed President Patrick Harker was set to give a speech at 11 a.m. Eastern on the economic outlook as well as on fintech at a conference at his regional bank.

What other data are investors watching?

Which other assets are moving?

The yield for the 10-year German bond , known as the bund, was at 0.469%, down 1 basis point. The sovereign paper is viewed as a gauge of the health of the European economy, because Germany is the largest eurozone economy.

(END) Dow Jones Newswires

September 29, 2017 11:01 ET (15:01 GMT)