BOND REPORT: Treasury Yields Slip After Housing Starts As Investors Brace For Fed Minutes
The Federal Reserve will release minutes from the July policy meeting at 2 p.m. Eastern
Treasury prices rose, and yields fell, in early Wednesday trade after a tepid reading for housing starts cast a shadow on the pace of economic growth and the picture for higher inflation, lifting demand for U.S. government paper.
Investors also awaited the release of the Federal Reserve's minutes from the July policy meeting, which is widely expected to center on a balance sheet wind-down, a form of monetary tightening that could drive yields higher.
The 10-year Treasury's yield fell 1.8 basis point to 2.255%. Likewise, the yield for the 30-year Treasury bond, or the long bond, dipped 2 basis points to 2.830%, while the shorter 2-year note's yield showed the least change, edging lower 0.8 basis point to 1.346%, paring back its gain so far this week gain to 4.8 basis points.
Bond prices move in the opposite direction of yields.
Traders kicked off their day as a weaker-than-expected reading for housing-starts data helped to spur bond buying, pushing down the benchmark 10-year Treasury yield around 3 basis points from its intraday highs. Stronger inflation and growth expectations can prove bearish for holders of government debt.
Builders broke ground on less homes in July, running at an 1.16 million annual rate, and falling below the MarketWatch consensus forecast of 1.23 million. Though notoriously volatile and frequently revised, the number marks a sharp 4.8% drop from June's pace.
"It is difficult to believe this is the start of a trend, given that homebuilders remain very optimistic. However, the constraints builders face are holding back more starts: labor and lot shortages and rising costs for materials," noted Jennifer Lee, senior economist for BMO Capital Markets, referring to a boost in builder sentiment in August (http://www.marketwatch.com/story/home-builder-sentiment-roars-back-as-buyers-turn-out-in-force-2017-08-15).
See: Housing starts stumble in July as new-home construction churns gradually higher (http://www.marketwatch.com/story/housing-starts-stumble-in-july-as-new-home-construction-churns-gradually-higher-2017-08-16)
But most investors were gearing up for the release of the minutes from the July 17 meeting by the policy-setting Federal Open Market Committee set to be released at 2 p.m. Eastern Time. Analysts expect some discussion of the balance sheet tapering to help set it up for its start on September. New York Fed President William Dudley (http://www.marketwatch.com/story/feds-dudley-wants-to-keep-raising-interest-rates-slowly-2017-08-14)and Chicago Fed President Charles Evans (http://www.marketwatch.com/story/feds-evans-backs-balance-sheet-reduction-but-ambivalent-toward-another-rate-hike-2017-08-09), voting member, both backed for the process to begin soon.
In addition, market participants were hoping for senior Fed officials to offer further clarification on the inflation outlook. A befuddling absence of wage pressures amid strong jobs growth has economists worrying that the central bank will continue to miss its 2% inflation target, where the Fed might be more comfortable with an aggressive pace of monetary tightening.
"There's going to be a specific focus on inflation. I know Janet Yellen has insisted inflation is transitory, but investors will see what the other Fed's member views are on that topic," said Charlie Ripley, investment strategist at Allianz Investment Management.
Dallas Fed President Robert Kaplan, a voting member said on Tuesday night he would "like to see more evidence that [the central bank is] making progress on our 2% inflation objective," in an interview with American Banker, a trade publication (https://www.americanbanker.com/news/10-questions-for-dallas-fed-president-robert-kaplan). But like other members of the FOMC he said the wind-down of the Fed's portfolio of government paper and mortgage-backed securities should start soon.
Elsewhere, investors focused on reports that European Central Bank President Mario Draghi won't use the Fed's meeting in Jackson Hole, Wyo., to signal the beginning of the end for its EUR60 billion ($70.18 billion) per month bond-buying program, according to Reuters (http://www.reuters.com/article/us-ecb-policy-draghi-idUSKCN1AW0LF?il=0). Instead, October was punted as the most likely date for an announcement of a major policy shift, the report said.
But the bond bulls appeared to take little notice, as the German 10-year Treasury yield fell 2.3 basis points to 0.459%, meaning a modest selloff in government paper. If the ECB rolls back its monetary easing it could result in higher yields for European paper, and have knock-on effects for the U.S. bond market.
Widening or narrowing interest-rate differentials, and therefore also for yields, can spark large movements of money between countries because investors are looking for higher and more diversified returns across the world.
(END) Dow Jones Newswires
August 16, 2017 11:58 ET (15:58 GMT)