BOND REPORT: Treasury Yields Extend Rise As Investors Await Fed Meeting

Fed expected to begin wind-down of $4.5 trillion balance sheet

Treasurys pulled back Monday, pushing yields higher, as traders shed government paper ahead of a meeting of Federal Reserve policy makers that's expected to begin the process of winding down the central bank's balance sheet.

The benchmark 10-year Treasury yield added 2.8 basis points to 2.230%, extending its longest streak of yield gains since March 9, while the 30-year bond yield rose 3 basis points to 2.804%, compared with 2.772% on Friday.

The shorter-end of the market saw less movement, with the 2-year Treasury note yield slightly higher at 1.393%, after settling at 1.384% late Friday,

Bond prices move inversely to yields.

Selling pressure on the long-end gained impetus as investors continued to rotate out of assets perceived as safe into stocks and other assets. U.S. stock indexes notched record highs again on Monday, while the Japanese yen and gold weakened.

"Seems to be continuing momentum from last week. We're still in a risk-on mode," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.

Last week saw the bond bulls retreat as investors looked past the fears that previously drove the 10-year Treasury yield below 2.10%, including tensions surrounding North Korea and damage from Hurricane Irma.

It was more of the same for Monday as bond investors ignored the lingering geopolitical risks from North Korea. After the North Korean regime launched its intercontinental ballistic missile, or ICBM, over Japan, investors didn't blink, with yields staying relatively unchanged on Friday (http://www.marketwatch.com/story/short-dated-treasury-yields-rise-as-traders-await-data-deluge-fed-meeting-2017-09-15).

Looking ahead, traders will watch this week's meeting of the Federal Open Market Committee, which is expected to kick-start the reduction of the Fed's balance sheet on Wednesday. But some say with so much of the plan articulated and anticipated beforehand, the bond market reaction would be muted.

"It's very likely to be initially greeted with a collective yawn from markets, if only because it has been so well choreographed," said Aaron Kohli and Ian Lyngen, interest-rate strategists for BMO Capital Markets, in a note to clients.

See: Why the bond market isn't freaking out from the Fed's shift to quantitative tightening (http://www.marketwatch.com/story/why-the-bond-market-isnt-freaking-out-from-the-feds-shift-to-quantitative-tightening-2017-09-14)

Instead, analysts highlighted that changes to the dot plot, individual Fed members forecasts for future interest rates, could unsettle investors. In addition, the risk that Federal Reserve Chairwoman Janet Yellen "takes a more dismissive line toward the downside surprises in the inflation data" could surprise those expecting a more dovish tilt, wrote Matthew Hornbach, an interest-rate strategist for Morgan Stanley.

Read:Fed to take historic leap into the unknown (http://www.marketwatch.com/story/fed-to-take-historic-leap-into-the-unknown-2017-09-14)

He said if Yellen aligns with New York Fed President William Dudley it could give a rude shock to those who feel economic data should play a bigger role in dictating policy. In a speech two weeks ago, Dudley reaffirmed his desire to see a December rate increase even after he acknowledged the last few months of soft inflation readings.

Also read: Fed's Dudley shows no signs of wavering from support for December interest-rate hike (http://www.marketwatch.com/story/feds-dudley-shows-no-signs-of-wavering-from-support-for-december-interest-rate-hike-2017-09-07)

But last week's stronger-than-expected inflation number (http://www.marketwatch.com/story/higher-rents-gas-boost-inflation-in-august-cpi-shows-2017-09-14)could give Yellen and other Fed members the support they need to raise interest rates one more time this year, especially if the bounce in consumer prices persists into a more substantial uptrend.

While the Fed prepares to embark on a form of monetary tightening, some central banks look nowhere near taking their feet off the pedal. The Bank of Japan is likely to maintain its so-called yield curve control policy, where it targets certain interest rates in the bond market through asset purchases, at Thursday's meeting.

Elsewhere, Portuguese bonds rallied, with the 10-year government bond yield plummeting more than 35 basis points after S&P Global Ratings raised Portugal's credit rating to "investment-grade" status on late Friday. The ratings company boosted the country's growth forecast to an annual 2% between 2017 and 2020, also reflecting the "solid progress [Portugal] has made in reducing its budget deficit."

(END) Dow Jones Newswires

September 18, 2017 17:49 ET (21:49 GMT)