BOND REPORT: Treasury Yields Rise As Fed's Williams Signals Balance Sheet Reduction 'this Fall'

Treasury signals no coming issuance of 50-year, 100-year bonds

U.S. Treasury yields ticked slightly higher on Wednesday as a report on private-sector employment, all but matched expectations and San Francisco Fed President John Williams signaled that the central bank could start to unwind its $4.5 trillion balance sheet as early as this fall.

In a speech to the Economic Club of Las Vegas (http://www.marketwatch.com/story/feds-williams-wants-to-start-shrinking-the-balance-sheet-this-fall-2017-08-02), Williams said the Fed will start the process "nice and easy" and it would take "about four years to get the balance sheet down to a reasonable size."

But his comments on timing coincided with some selling in bonds, pushing prices slightly lower and yields higher. Williams isn't a voting member of the Fed's policy-setting Federal Open Market Committee in 2017.

The yield on the benchmark 10-year U.S. Treasury note rose 1.1 basis points at 2.264%, while the 2-year note yield added 2 basis points at 1.363%. The yield on the 30-year U.S. Treasury bond , or long bond, slipped 0.6 basis point at 2.847%. Yields rise as debt prices fall.

A reduction of the Fed's asset portfolio, accumulated during the 2008-'09 financial crisis, could have the effect of further tightening monetary policy in addition to the central bank's continuing plan to lift rates from ultralow levels. For that reason, some traders had discounted the likelihood of the Fed starting to trim its portfolio amid a recent batch of lackluster economic readings.

Earlier in the session, payroll processor ADP said private-sector employers added 178,000 new jobs in July, which mostly matched Wall Street expectations. Economist polled by Econoday had forecast a July gain of 173,000 jobs (http://www.marketwatch.com/story/private-sector-continues-to-see-strong-job-gains-in-july-adp-says-2017-08-02). On the upside, ADP adjusted June's gain to 191,000 from 153,000.

Investors look to the report for clues to official employment data, which gauges job creation in the private and public sector. But the ADP release tends to be a poor proxy, wrote analysts at UniCredit Bank, in a note.

Government-bond traders also reacted to news that the Treasury Department wasn't going to make any immediate changes to the structure of its bond offering by auctioning so-called ultralong bonds with maturities from 50 to 100 years. However, it said at a conference on Wednesday that it was still exploring the option of such long-dated issues.

"Based on current fiscal forecasts, Treasury intends to maintain coupon issuance sizes at current levels over the upcoming quarter. Treasury will continue to monitor projected financing needs and make appropriate adjustments as necessary. Treasury plans to address changes in any seasonal borrowing needs over the next quarter through changes in regular bill auction sizes and/or cash management bills," the Treasury Department said in a statement.

Yields on 10-year and 30-year Treasurys briefly broke lower after the report. The 30-year bond hit a low of 2.832% while the 10-year touched a low of 2.245%.

Thomas Simons, senior money-market economist at Jefferies said Treasury tends to be "very deliberate about changing issuance patterns" so as not to roil markets.

Meanwhile, Cleveland Fed President Loretta Mester on Wednesday said (http://www.marketwatch.com/story/fed-should-keep-to-its-slow-tightening-pace-even-with-tepid-inflation-mester-says-2017-08-02)the Fed is tightening monetary policy at such a gradual pace that it doesn't have to change course even with signs of weakness in economic and inflation data. She made her statement on Wednesday at a Community Bankers Association of Ohio event in Cincinnati. Mester isn't a voting FOMC member this year.

The so-called personal-consumption expenditures index, the Fed's preferred inflation gauge, was up 1.4% over the last 12 months through June, down from 2.2% earlier in the year. The core rate, seen as a better gauge of future inflation, has also softened to a 1.5% pace in June from 1.9% at the start of the year.

Weak inflation suggests the economy isn't running on all cylinders and that has supported bond buying, since rising inflation undercuts the fixed value of Treasurys.

Looking ahead, Friday's closely watched monthly jobs report is likely to wield the most influence on the government bond markets this week.

Economists surveyed by MarketWatch produced a consensus forecast for a 180,000 rise in July nonfarm payrolls, while the unemployment rate is predicted to tick down to 4.3% from 4.4%. Average hourly earnings are seen rising 0.3% after a 0.2% rise in June.

Read:Ignoring Washington chaos, companies likely kept up strong hiring in July (http://www.marketwatch.com/story/ignoring-washington-chaos-companies-likely-kept-up-strong-hiring-in-july-2017-07-30)

(END) Dow Jones Newswires

August 02, 2017 16:02 ET (20:02 GMT)