BOND REPORT: Treasurys Tread Water Ahead Of Inflation Report
10-year Treasury yield holds around 2.16%
U.S. Treasurys stabilized, leaving yields little changed, on Wednesday as traders appeared reluctant to make significant moves ahead of report on producer prices due later in the session.
The 10-year Treasury note yield was slightly lower at 2.166%, compared with 2.171% late Tuesday in New York, but still markedly higher relative to its levels last week. The 30-year Treasury yield edged slightly lower, at 2.764% in recent trade, versus 2.774%, while the yield on the short-term 2-year Treasury note held steady at 1.335%.
Bond prices and yields move in the opposite directions.
The Labor Department's producer-price index for August due at 8:30 a.m. Eastern Time on Wednesday will be closely watched for signs of rising inflation. The average estimate produced by a survey of economists by MarketWatch was for a rise of 0.3%, compared with a fall of 0.1% for July (http://www.marketwatch.com/story/us-wholesale-inflation-fall-01-in-july-first-decline-in-almost-a-year-2017-08-10), which marked the first drop in almost a year.
Soggy inflation has been the biggest bugaboo for global central bankers and bond investors alike. In theory, inflation and rising prices should coincide with a U.S. job market that has looked mostly healthy.
However, the annual rate of inflation has fallen below the Federal Reserve's 2% target, providing some headwinds to the central bank's plan to normalize monetary policy by lifting rates and unwinding its $4.5 trillion asset portfolio.
Presently, the market is pricing in roughly 42% chance of one more rate increased by the Fed before the end of 2017, according to CME Group Data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
Over the past year overall producer prices have decelerated to a 1.9% annual rate, and have steadily dipped from a high of 2.5% in April. The July annual rate has been the lowest since January.
Muted inflation can encourage buying in government paper because rising inflation erodes a bond's fixed value, particularly in longer maturities. But analysts say that new changes to how producer prices are computed has weakened their correlation with consumer price inflation, arguably the more important figure.
"Rising input prices are on our radar as a medium-term concern, but less as an inflation driver and more as a risk to corporate profitability," said Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets, in a note to a clients.
His concern is higher producer prices could crimp earnings. This could lead to employers cutting staff to maintain their profit margins and reflect the economy is at the tail-end of its expansion.
For all the importance placed on this week's inflation data, traders could be hesitant to trade ahead of the central bank's policy-setting confabulation next Tuesday and Wednesday, where a change in policy and rates aren't anticipated, but where further clues about the game plan for the Fed and its view on the U.S. economy will be closely watched.
Looking ahead, the Treasury Department is slated to auction $12 billion in 30-year 2.75% bonds. On Tuesday, a $20 billion auction of 10-year notes received a tepid response, perhaps reflecting a lowered outlook for risks that had driven bond prices higher and yields lower over the past several session.
Yields have been largely pressured by concerns about tensions between North Korea and the U.S. and the impact on Hurricanes Irma and Harvey on the overall economy. Recent yields moves suggests, however, that traders are placing less weight on those factors having a lasting effect on markets and the economy. The abatement of those fears recently also has rejuvenated appetite for assets perceived as risky pushing on Tuesday the Dow Jones Industrial Average , the S&P 500 index and the Nasdaq Composite Index to their first day of simultaneous records (http://www.marketwatch.com/story/sp-primed-to-build-on-all-time-high-as-clock-ticks-down-to-apple-event-2017-09-12) since late July.
In exchange-traded products, the iShares 20+ Year Treasury Bond ETF (TLT), a popular way to be on bonds, was up slightly at 0.1%. The fund, also known as TLT for its ticker symbol, has risen 6.4% so far this year.
(END) Dow Jones Newswires
September 13, 2017 08:20 ET (12:20 GMT)