BOND REPORT: Yield Curve Steepens Ahead Of Trump's State Of The Union Speech
Fed to conclude policy meeting on Wednesday
Short-dated Treasury yields were flat on Tuesday while longer dated yields extended their climb ahead of an important State of the Union address from President Donald Trump. The moves for U.S. government paper also come as the Federal Reserve is set to kick off its two-day policy meeting (http://www.marketwatch.com/story/fed-to-take-a-step-toward-a-march-interest-rate-hike-2018-01-26)with an updated outlook due Wednesday.
How are Treasurys performing?
The yield on the 10-year Treasury note was up 3 basis point at 2.725%, the highest since April 2014, according to WSJ Market Data Group. The 30-year bond yield climbed 4 basis points to 2.980%, its highest since Mar. 2017.
Meanwhile, the 2-year note yield was virtually unchanged at 2.124%.
Bond prices move inversely to their yields.
What is driving markets?
Amid higher inflation prospects, market participants saw the yield curve steepen, reflecting a wider gap between short-dated and long-dated bond yields. The 10-year note yield and the 30-year bond yield are sensitive to shifting expectations for future price pressures.
Investors anticipate an economic boost from corporate tax cuts and other stimulus measures which could prompt the Federal Reserve to raise interest rates at a faster pace than the roughly three or four that the market has previously priced in, undercutting appetite for bonds.
See: Fed to take a step toward a March interest-rate hike (http://www.marketwatch.com/story/fed-to-take-a-step-toward-a-march-interest-rate-hike-2018-01-26)
The uptrend in yields for government paper has created some headwinds for a record-setting run in global equities, with the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite Index fell for a second session in a row (http://www.marketwatch.com/story/dow-futures-slide-150-points-signaling-another-painful-session-2018-01-30).
Richer bond yields can undercut demand for assets perceived as relatively risky like stocks (http://www.marketwatch.com/story/will-rising-bond-yields-slay-the-stock-market-rally-2018-01-23), with investors tending to gravitate to safety of higher-yielding paper.
Later Tuesday, Trump will deliver his first official State of the Union address, which investors will keenly watch for signs of additional fiscal-stimulus measures to come. With the economy close to full capacity, analysts say the timing of Trump's pro-growth legislation could spur inflation faster than expected.
On Wednesday, Fed policy makers, in Chairwoman Janet Yellen's last meeting, will offer further details about the central bank's plan for reducing its crisis-era bond portfolio and communicate an updated economic and monetary policy outlook, which tends to have an outsize influence on short-date notes.
Read: Yellen's legacy is looking pretty good as she enters final meeting (http://www.marketwatch.com/story/yellens-legacy-is-looking-pretty-good-as-she-enters-final-meeting-2018-01-30)
What are strategists saying?
"There was nothing particularly igniting the selloff. However there's no doubt that global yields remain too low given strong growth, the likely pick up in U.S. inflation, much less QE going forward, significantly higher upcoming U.S. treasury supply, higher oil and a weaker dollar," said Jim Reid, a strategist at Deutsche Bank, in a note.
What else are on investors' radar?
Consumer confidence rose to 125.4 in January from 123.1 at the end of last year (http://www.marketwatch.com/story/consumers-very-confident-in-economy-but-uncertain-how-tax-plan-will-effect-them-2018-01-30). This comes after the Bureau of Economic Analysis reported the savings rate fell to 2.4%, the lowest since 2005. Households are loosening their purse strings as the U.S. economy hit its stride.
Bond investors are eyeing the U.S. Treasury's quarterly refunding announcement on Wednesday morning where the government will say the size and of upcoming debt auctions. Some are worried a deluge of issuance could swamp investors (http://www.marketwatch.com/story/bond-market-braces-for-1-trillion-tsunami-of-treasurys-this-year-2018-01-16) already contending with the reduction of the Fed's balance sheet.
(END) Dow Jones Newswires
January 30, 2018 16:14 ET (21:14 GMT)