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Bond Report: Treasury yields are mixed to start week, ahead of Fed meeting

Treasury yields were mixed Monday as investors geared up for this week’s meeting of Federal Reserve policy makers.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.283%

was marginally higher at 1.284% versus around 1.280% late Friday afternoon, according to data from FactSet. Yields fall as debt prices rise.

The 2-year note yield
TMUBMUSD02Y,
0.202%

was at 0.203% versus 0.194% on Friday.

The 30-year Treasury bond yield
TMUBMUSD30Y,
1.923%

declined to 1.918%, compared with 1.924%.

What’s driving the market?

Treasury yields saw volatile trade last week, with the 10-year rate dipping to a five-month low before bouncing back to briefly trade above 1.30%.

Yields were under renewed pressure Monday as global equities opened the week with a negative tone, undercut in part by U.S.-China tensions. China blamed the U.S. for a stalemate in bilateral relations as high-level talks began in the Chinese city of Tianjin.

Data on Monday showed new home sales fell 6.6% in June to an annual rate of 676,000, the lowest since the first month of the COVID-19 pandemic in early 2020, as high prices and a limited selection appeared to frustrate would-be buyers.

The main event this week, however, is likely to be the two-day meeting of the Fed’s policy-setting Federal Open Market Committee, which will conclude on Wednesday.

Policy makers are expected to discuss plans around eventually slowing the pace of the Fed’s monthly bnd purchases. But investors expecting clear answers about the crucial questions of when the tapering will start and the pace of any pull back will likely be disappointed, economists said.

Read: Fed to tiptoe toward tapering this week

Investors will also deal with fresh supply, with the Treasury due to auction $60 billion in 2-year notes Monday.

What are analysts saying?

“There is still a lot of cash looking for a home in the front-end of the market,” said Jefferies economists Thomas Simons and Aneta Markowska, in a note.

“Although the most acute collateral shortages are in the bill market, and many of the investors in that market are constrained to stay in it, it is still reasonable to expect that there will be some spillover demand for today’s auction,” they said.

Overnight, stocks in China tumbled as the country’s relations with the U.S. continued to fray, and a crackdown appeared to be underway on Chinese technology and education sectors. “This caused an immediate flight to
quality in U.S. Treasuries pushing 10-year yields lower by 3.5 [basis points],” said managing director Tom di Galoma of Seaport Global Holdings.

“We are expecting very little change in Fed policy on Wednesday and for the Fed address taper at the September meeting rather than at Jackson Hole in August,” he said, in a note. “The most likely scenario is for a pullback in MBS (mortgage-backed securities) buying.”

At UniCredit, analysts said in a Monday note that “in all probability, the next change in the Fed’s monetary-policy stance will be a reduction of its asset purchases.”

“However, there is widespread belief that the central bank will not become more concrete in this regard at its upcoming meeting. Consequently, there is a decent chance that the FOMC meeting will not provide a major impulse towards higher yields,” they said. “An extended period of (extremely) low government bond yields, in turn, would support general market sentiment, particularly if the rates complex remains immune to thriving developments in other market segments.”

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