BOND REPORT: Treasury Yields Rise Slightly After 13-year High In ISM Manufacturing Index

Investors grapple with Las Vegas massacre, Catalan independence vote

U.S. Treasurys ticked higher on Monday as investors grappled with a strong reading by a U.S. manufacturing activity gauge and geopolitical concerns, including a Catalonian independence referendum and the deadliest shooting in modern U.S. history.

Treasury yields beat a retreat from their intraday highs reached after a survey of Japanese businesses showed optimism among the nation's big manufacturers was at a decade high, suggesting global growth continued to gain impetus from Japan. The country has historically struggled to cure deflation and revitalize its stagnant economy.

What are yields doing?

U.S. government paper across the board rose about a basis point. The 10-year benchmark Treasury yield rose to 2.337%. The shorter two-year note yield edged higher to 1.487%, while the 30-year bond yield was up to 2.866%. Bond prices move in the opposite direction of yields.

What did market participants say?

"There's definitely a lot of crosswinds going through the marketplace," said Tom di Galoma, managing director of Treasurys trading for Seaport Global Securities. "But we've gone through some critical levels. Whenever we've gone past 2.30% in the 10-year [Treasury], we see some decent buying."

But he suggested the bond bears could see the prospect for higher yields if the tax overhaul bill makes strides in Congress and if changes to the make-up of the Federal Reserve's interest-rate-setting body gave it a more hawkish bent. Of particular importance, di Galoma said, is whether Federal Reserve Chairwoman Janet Yellen is replaced when her term expires in February.

'She is as dovish as they get, anyone who can replace her is going to be more [hawkish] than she was," he said.

What is moving markets?

A Las Vegas mass shooting (http://www.marketwatch.com/story/reports-of-dead-injured-after-mass-shooting-at-las-vegas-concert-2017-10-02)on Sunday left at least 58 people dead and more than 500 people injured.

And a region of Spain, Catalonia, carried out a disputed referendum on independence (http://www.marketwatch.com/story/eu-headed-for-new-crisis-analysts-fear-political-turmoil-after-violent-catalonia-vote-2017-10-02). The vote erupted in violence as Madrid tried to stop the referendum from taking place.

But earlier in the day, Treasurys had initially traded higher after the Bank of Japan's survey of business conditions, or "tankan," showed the sentiment index among large manufacturers had risen to 22, a 10-year high, in the third quarter (http://www.marketwatch.com/story/japans-business-confidence-hits-10-year-high-2017-10-01). The jump may give central bankers the confidence to continue easing monetary policy after the BOJ's controversial asset-purchasing program drew criticism that it wouldn't help inflation reach the central bank's 2% annual target.

What data are in focus?

The ISM manufacturing index for September (http://www.marketwatch.com/story/eu-headed-for-new-crisis-analysts-fear-political-turmoil-after-violent-catalonia-vote-2017-10-02), a gauge of manufacturers's health, came in at 60.8, its highest level since 2004. Economists surveyed by MarketWatch had a median forecast for a reading of 58.1. Any number above 50 tends to represent growth.

The Commerce Department reported that construction spending for August rose 0.5% (http://www.marketwatch.com/story/construction-spending-strengthens-in-august-led-by-rebound-in-public-sector-outlays-2017-10-02). Economists expected an 0.4% gain.

What did central bankers say?

Minneapolis Fed President Neel Kashkari, a voting member, said (http://www.marketwatch.com/story/feds-kashkari-prefers-no-more-rate-hikes-until-inflation-hits-2-target-2017-10-02) the Fed should not raise interest rates until inflation hit the central bank's 2% annual target.

The European Central Bank's chief economist, Peter Praet, said investors would be able to better handle a slower pace of bond-buying when markets were more placid, reported Reuters (http://uk.reuters.com/article/uk-ecb-policy-bonds/calmer-times-may-call-for-smaller-more-extended-ecb-bond-buys-praet-idUKKCN1C71LY?il=0).

What other assets moved?

The uncertainty after the Catalonian referendum weighed on demand for government paper from Spain, a so-called peripheral eurozone country. This widened the yield spread between it and bonds backed by healthier economies, such as Germany, reflecting the fact that investors were demanding more compensation and higher yields for Spanish debt.

The German 10-year government bond yield fell more than a basis point to 0.450%, even as the yield for an equivalent Spanish government bond jumped 9 basis points to 1.694%.

(END) Dow Jones Newswires

October 02, 2017 16:24 ET (20:24 GMT)