BOND REPORT: Treasurys Retrace Losses As Investors Say September Selloff Overdone

Politico reports Treasury Secretary Steven Mnuchin favors Fed. Gov. Jerome Powell to take over from Yellen as Fed Chair.

Treasury prices trimmed losses Tuesday, pulling yields back from intraday highs, as a prolonged selloff appeared to lose some steam.

Prices for U.S. government paper fell across the board last week after a Republican tax-cut effort gained steam and Federal Reserve Chairwoman Janet Yellen delivered a hawkish speech (http://www.marketwatch.com/story/yellen-says-fed-should-be-wary-of-raising-rates-too-gradually-2017-09-26), underlining expectations for another rate increase by the end of the year.

What did yields do?

The 2-year note yield fell a basis point to 1.475%, easing off from a 10-year high. Yields for shorter maturities, more sensitive to expectations for higher interest rates, have steadily climbed in the past few weeks after the Fed signaled its desire for tighter monetary policy despite several months of tepid inflation readings (http://www.marketwatch.com/story/fewer-auto-sales-dent-consumer-spending-in-august-inflation-still-weak-pce-shows-2017-09-29).

The benchmark 10-year Treasury note yield edged higher to 2.332%, snapping a five day streak of gains, while the 30-year bond yield stood steady at 2.872%. Bond prices move inversely to yields.

What did central bankers say?

Fed Gov Jerome Powell said he was most concerned with getting the U.S. economy back to a faster rate of growth (http://www.marketwatch.com/story/jerome-powell-in-the-running-for-top-fed-spot-echoes-one-of-trumps-favorite-economic-themes-2017-10-03), echoing one of President Donald Trump's favorite economic themes. According to prediction markets, (https://www.predictit.org/Market/3306/Who-will-be-Senate-confirmed-Fed-Chair-on-February-4%2C-2018) he is one of the front-runners to take over from Fed Chairwoman Janet Yellen once her term expires in February. Trump has interviewed Powell (http://www.marketwatch.com/story/trump-interviewed-fed-gov-powell-for-top-job-at-central-bank---wsj-2017-09-29) and former Fed Gov. Kevin Warsh (http://www.marketwatch.com/story/five-things-to-know-about-kevin-warsh-who-may-be-the-next-fed-chairman-2017-09-29) for the position.

Treasury Secretary Steven Mnuchin reportedly prefers Powell as Fed Chair, according to Politico (http://www.politico.com/tipsheets/morning-money). In contrast to Yellen, Powell and Marsh are in favor of relatively less financial regulation, a major policy priority of the Trump administration.

Read:Trump says he will make decision on top Fed job in 2 to 3 weeks (http://www.marketwatch.com/story/trump-says-he-will-make-a-decision-on-top-fed-job-in-2-to-3-weeks-2017-09-29)

What did market participants say?

"The selloff has been just been really prolonged. You're getting levels at 2.36%, that's providing significant support. There's not a lot of volume in this trading. In the absence of anything else, investors are only trading technicals," said Aaron Kohli, fixed-income strategist for BMO Capital Markets.

"It's difficult to find someone as dovish as Yellen. Powell would offer continuity to the current board. Though everyone sounds very hawkish going into the seat, the reality is when they're in the chair, they'll be more dovish," Kohli said on Powell's candidacy.

What data is on investors' radar?

Though investors will look forward to an empty data docket for Tuesday, analysts said traders will brace for the ADP private payrolls report on Wednesday and the Labor Department's September jobs report on Friday.

If official employment data shows the U.S. economy is adding jobs at a healthy pace, it could give the Federal Reserve the encouragement it needs to push rates higher, sapping appetite for government bonds. But many investors say a December rate increase likely, barring a significant deterioration in economic data, as the central bank has telegraphed its intent to push for tighter monetary policy at its September's meeting (http://www.marketwatch.com/story/text-of-september-fomc-statement-2017-09-20).

What did other assets do?

Yields for European government paper initially rose after the producers price index rose in August by 0.3% around the eurozone, but the bond-buying faded after Treasurys stemmed their losses. Sovereign bond yields around the world tend to rise and fall in sync as traders will whittle away large changes in interest rate differentials.

The 10-year German government debt tipped higher to end at 0.459%, while the French 10-year government bond added a basis point to 0.749%.

(END) Dow Jones Newswires

October 03, 2017 16:28 ET (20:28 GMT)