Vice Chairman Fischer set to step down from Fed
Treasury prices fell Wednesday, pushing up long-term yields after President Donald Trump and lawmakers agreed to extend the debt limit for three months to mid-December, giving relief to investors who left the perceived safety of longer-term government paper.
Continue Reading Below
The benchmark 10-year Treasury note yield climbed 3.6 basis points to 2.108%, from 2.072% in the previous session. The two-year Treasury note yield ended at 1.306%, versus 1.292% on Tuesday. Meanwhile, the 30-year bond yield added 3.5 basis points to 2.724%. Bond prices move inversely to yields.
Long-dated Treasury yields rose after the White House and lawmakers reached a deal (http://www.marketwatch.com/story/trump-agrees-to-extending-debt-limit-government-funding-to-december-democrats-say-2017-09-06) that would extend both the debt limit and government funding to Dec. 15, as well as provide aid to states devastated by Hurricane Harvey. That came after Senate Minority Leader Chuck Schumer, D-N.Y., and House Democratic Leader Nancy Pelosi, D-Calif., announced they would back such a deal earlier in the day. Investors could take hope from how Trump and Democrats reached across the aisle, after legislative gridlock had checked his pro-growth agenda.
Government paper due to mature on early October enjoyed a relief rally, with the yield for the four-week bill plummeting close to 20 basis points to 1.027%, only a day after an auction for the same bills had suffered a "ghastly" result, in the words of one market participant (http://www.marketwatch.com/story/debt-ceiling-concerns-contribute-to-ghastly-4-week-t-bill-auction-result-2017-09-05).
The yield moves come only a day after heavy bond-buying pushed long-dated Treasury yields to fresh 10-month lows on Tuesday (http://www.marketwatch.com/story/treasury-yields-slip-as-north-korea-triggers-demand-for-havens-2017-09-05). Amid a streak of unsettling developments on the North Korean regime's nuclear capabilities and concerns about Hurricane Irma as Texas wrestles with the devastating aftermath of Hurricane Harvey, investors snapped up assets perceived as havens.
See: 'Potentially catastrophic' Hurricane Irma makes landfall in the Caribbean (http://www.marketwatch.com/story/potentially-catastrophic-hurricane-irma-makes-landfall-in-the-caribbean-2017-09-06)
The natural disasters refuse to relent, with Hurricane Irma making landfall in the Caribbean. Bond investors have speculated that the damages from Hurricane Harvey and, subsequently, Irma, would leave the U.S. economy with sizable bruises, tamping down on inflation pressures. Federal Reserve Gov. Lael Brainard said in speech on Tuesday (http://www.marketwatch.com/story/fed-may-have-to-slow-interest-rate-hikes-given-subdued-inflation-brainard-2017-09-05)that Harvey would "raise uncertainties about the economic outlook for the remainder of the year."
Meanwhile, Federal Reserve Vice Chairman Stanley Fischer on Wednesday announced plans to resign (http://www.marketwatch.com/story/fed-vice-chairman-fischer-announces-resignation-citing-personal-reasons-2017-09-06), months before his term as the central bank's No. 2 official was due to expire in June. His expected departure, as early as October, comes as the market frets about who will take the No. 1 role at the Fed, with Chairwoman Janet Yellen's term ending in February.
It is unclear if Trump will renominate Yellen or if she would accept an extension of her tenure, raising doubts about the complexion of the central bank in coming months as it struggles to normalize interest rates and unwind a $4.5 trillion crisis-era portfolio of government securities.
Also read: Trump's ability to control Fed sped up by Fischer resignation (http://www.marketwatch.com/story/trump-ability-to-control-fed-sped-up-by-fischer-resignation-2017-09-06)
The combination of concerns helped to overshadow a raft of economic data released in the morning. The U.S. economy logged a smaller trade deficit of $43.7 billion (http://www.marketwatch.com/story/us-trade-deficit-shows-no-sign-of-shrinking-2017-09-06), falling below the $44.8 billion from economists surveyed by MarketWatch, after both imports and exports showed a slight decline. The ISM nonmanufacturing index, a gauge of the service industry's health, rebounded to 55.3 in August from 53.9 in July (http://www.marketwatch.com/story/most-us-companies-post-faster-growth-in-august-ism-services-survey-finds-2017-09-06), but below the median consensus forecast of 56.
The Fed's Beige Book (http://www.marketwatch.com/story/feds-beige-book-finds-worry-about-health-of-us-auto-industry-2017-09-06), a collection of anecdotes on economic conditions, followed previous iterations by flagging tight labor markets but also tepid wage growth, a conundrum for central bankers who need to see higher paychecks in the workforce to justify an exit away from accommodative monetary policy.
Elsewhere, investors eyed key monetary policy meetings after the Bank of Canada raised interest rates and awaited the European Central Bank's policy meeting on Thursday.
The Bank of Canada passed a quarter-percentage-point hike for a second time in its current tightening cycle, leaving the benchmark interest rate at 1%. A surge in economic growth, which ran at 4.5% annualized rate (http://www.marketwatch.com/story/canada-is-fastest-growing-g-7-member-after-45-gdp-surge-2017-08-31) in the second quarter of this year, has put pressure on the central bank to normalize monetary policy.
Deutsche Bank's CEO John Cryan advised the European Central Bank (http://www.marketwatch.com/story/deutsche-bank-ceo-urges-ecb-to-end-cheap-money-era-2017-09-06-74851710)to begin cutting down its asset purchases, citing concerns that an era of cheap money had stoked asset bubbles "in more parts of the capital market, where we wouldn't have expected them." But analysts feel ECB President Mario Draghi would try to prevent the euro from surging higher in Thursday's meeting by highlighting the importance of keeping quantitative easing in place.
"The rally in the euro since April will make this week's ECB meeting pretty dull. The anticipated announcement that the central bank will start tapering its asset purchase program won't happen," said Patrick O'Donnell, senior investment manager at Aberdeen Standard Investments.
The Canadian 10-year government bond was up 9.6 basis points to 1.956%. Meanwhile, the German 10-year government bond was close to flat at 0.344%.
(END) Dow Jones Newswires
September 06, 2017 16:35 ET (20:35 GMT)