St. Louis Fed President James Bullard says interest rates are fine where they are now
Treasury yields tipped lower on Monday as a pair of dovish Federal Reserve speakers cast doubt on claims of worker shortages amid weak wage pressures, a troubling trend for economists who feel the central bank's desire for one more rate hike this year hinges on growing paychecks.
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The 30-year Treasury yield dropped 0.6 basis point to 2.837%, after losing more than 5 basis points last week. The 2-year Treasury yield fell 0.4 basis point to 1.355%, while the 10-year benchmark Treasury note ticked 1.1 basis point lower to 2.258%. Bond prices move in the opposite direction of yields.
St. Louis Fed President James Bullard, a nonvoting member, said the current level of short-term interest rates was appropriate (http://www.marketwatch.com/story/feds-bullard-says-short-term-interest-rates-are-fine-where-they-are-now-2017-08-07). His comments were largely expected, as Bullard is known as a monetary "dove" in favor of lower borrowing costs and accommodative monetary policies.
Minneapolis Fed President Neel Kashkari, a voting member, said he would continue to doubt claims of worker shortages if wages did not increase (http://www.marketwatch.com/story/feds-kashkari-says-hell-remain-doubtful-there-are-worker-shortages-until-wages-rise-2017-08-07), but did not touch on the outlook for monetary policy in his comments.
Kashkari's views are considered a "bellwether for what the doves might be thinking and most likely to sway the center," said Thierry Wizman, global interest rates and currencies strategist.
See: Why one Fed official is the skunk at the picnic on the jobs report (http://www.marketwatch.com/story/why-one-fed-official-is-the-skunk-at-the-picnic-on-the-jobs-report-2017-08-04)
Worries over the lack of wage increases, and accompanying inflation pressures, have been echoed by investors in government paper. The healthy employment data report last Friday should stimulate wage and consumer prices, but a lack of a follow-up in the past has worried economists.
Friday's consumer-price data could prove pivotal as it could either strengthen or diminish the case for a more aggressive schedule for rate hikes.
Traders anticipate a 50.4% chance of a December rate increase, according to the Chicago Mercantile Exchange's data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/).
With markets showing little fear of inflation, analysts say its resurgence could present one of the largest risks to bullish traders. Higher consumer prices erode the fixed value of bond payments, but could also prompt the U.S. central bank to tighten rates further, delivering a one-two punch that could make holding long-dated Treasurys painful.
The Federal Reserve is set to hike rates one more time this year, but senior Fed officials are conflicted over the move's prudence as inflation stays tepid.
"What could bring forward the timing of that hike? Higher-than-expected inflation in July and August would be a good place to start, at least to get the market more excited," said Matthew Hornbach, an interest-rate strategist at Morgan Stanley.
Meanwhile, the Treasury Department is slated to auction $62 billion of bonds this week as part of its quarterly refunding, ranging from tenors of 3 years to 30 years.
David O' Malley, chief executive officer of Penn Mutual Asset Management, said investor pessimism over a debt ceiling showdown could show in the debt sales (https://blog.pennmutualam.com/treasury-auctions-inflation-data/). Concerns that Congress might repeat its last-minute resolution of its fiscal woes could result in lackluster demand and higher yields.
In Europe, German 10-year government bonds, also known as bunds, held steady at 0.456% after German industrial production fell 1.1% month on month in June (http://www.marketwatch.com/story/german-industrial-output-surprises-with-a-fall-2017-08-07)-- the first decline in 2017 -- after posting a 1.2% increase in May.
(END) Dow Jones Newswires
August 07, 2017 16:13 ET (20:13 GMT)