BOND REPORT: Yield Curve Steepens As Tax Bill Nears Passage

By Sunny OhFeaturesDow Jones Newswires

Long-dated yields rose, while short-dated yields fell, on Monday amid mounting expectations that Congress will pass tax-cut legislation this week.

How are Treasurys doing?

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The 10-year Treasury note yield rose to 2.367%, up from 2.353% late Friday. The 2-year note yield ticked lower to 1.832%, from 1.840%. The 30-year bond yield rose to 2.717%, versus 2.685%.

Bond prices move in the opposite direction of yields.

What's moving markets?

The House and Senate are expected to vote on the tax bill this week after spending the past month working out differences between competing versions of the legislation and persuading holdout senators to support the final bill. Analysts have highlighted the bill's potential impact on yields. A deficit-widening tax cut would push the federal government to increase debt issuance, boosting the supply of Treasurys and potentially weighing on prices.

Investors also fearing the inflationary impact of the bill sold long-dated bonds and bought short-dated debt, steepening the so-called yield curve. The curve is a line mapping out yields across maturities and can serve as a gauge of growth expectations. But some traders said the bond market was taking a breather from a long running flattening trend, and the steepening would be short-lived.

What did market participants say?

"I don't think it's anything more than the fact that we got overextended on the flattening trade. We're trying to give some of that back. It's been pretty relentless," said Tom di Galoma, managing director for Treasurys trading.

What else is on investors' radar?

The National Association of Home Builders reported the housing market index for December rose to 74 (http://www.marketwatch.com/story/home-builder-confidence-roars-to-an-18-year-high-2017-12-18), from 69 in the previous month. This marks the strongest reading since 1999.

Minneapolis Fed President Neel Kashkari highlighted his concerns (https://medium.com/@neelkashkari/why-i-dissented-a-third-time-fccbdf0f16)that a flattening yield curve could augur a potential recession.

See: Why the yield curve flattening--a recession red flag--is the 'real deal' (http://www.marketwatch.com/story/why-the-yield-curve-flattening-is-the-real-deal-2017-12-15)

What other assets are on the move?

The German 10-year government bond yield was flat at 0.305%. While, the U.K. 10-year bond yield fell a basis point to 1.145%.

(END) Dow Jones Newswires

December 18, 2017 12:18 ET (17:18 GMT)