BOND REPORT: Treasury Yields Pare Decline On Economic Optimism, Climbing Stocks

Treasury yields erased their decline on Tuesday amid growing confidence over the progress of the U.S. economy and higher stock valuations.

Bond markets were closed on Monday in observance of Martin Luther King Jr. Day.

What are Treasurys doing?

The 10-year Treasury note yield ticked up to 2.559%, from 2.551% late Friday, according to WSJ market data. The yield for the benchmark maturity fell as low as 2.522% earlier in the morning. Bond-market investors have been closely watching the benchmark's yield around 2.6%, which has served as a key resistance point for the 10-year.

The 2-year note yield rose to 2.026%, from 2.001%, while the 30-year bond yield was mostly flat at 2.851%.

Bond prices move in the opposite direction of yields.

What's driving markets?

Yields for European bonds and Treasurys fell earlier after Reuters reported the European Central Bank was unlikely to drop its language on further bond buying at next week's meeting. This comes after previous reports the central bank signaled a willingness to change its policy statement to reflect improving growth in the eurozone. ECB governing council member François Villeroy de Galhau also said monetary stimulus should see a gradual withdrawal

But the bullish momentum fell by the wayside in the afternoon as rising stock prices, economic optimism and tax-bill concerns put pressure on U.S. government paper. Bond prices tend to fall when stocks climb as they both represent opposite poles in a spectrum of risk. Investors toggle between the two assets depending on their appetite for higher returns.

What did market participants say?

"It does look like stocks have a lot of momentum into next quarter. We're starting to see some decent economic numbers, and you're starting to get an idea of what is possible with corporate tax cuts, and that's had some impact on rates.," said Tom di Galoma, head of Treasurys trading at Seaport Global Securities.

"In the week ahead, the market will grapple with 2-year yields over 2% and 10-year yields that could well test 2.60% again. Data are light and the market is likely to focus on some additional Fedspeak, especially from Quarles at the end of the week as well as from Mester," said Ian Lyngen and Aaron Kohli, fixed-income strategists for BMO Capital Markets, in a note.

What else is on investors' radar?

The federal government may run out of cash on Friday if Congress cannot agree on a short-term spending bill. The chance of the Democrats and Republicans coming up with a viable deal appeared to slip after a bipartisan immigration deal was rejected by President Donald Trump last week. A government shutdown would diminish the haven qualities of U.S. debt and could drive up borrowing costs.

See: Here's how the stock market has handled past government shutdowns (http://www.marketwatch.com/story/heres-how-the-stock-market-has-handled-past-government-shutdowns-2018-01-16)

The Empire State manufacturing survey fell to 17.7 in January (http://www.marketwatch.com/story/empire-state-factory-gauge-softens-a-bit-in-january-2018-01-16), from 19.6 in December. The data release offers an economic snapshot of the state of New York.

What other assets are on the move?

The German 10-year government bond yield fell 2.6 basis points to 0.502%, according to Tradeweb data. The French 10-year government bond yield fell 2.2 basis points to 0.845%.

(END) Dow Jones Newswires

January 16, 2018 13:36 ET (18:36 GMT)