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Bond Report: Treasury yields drop as traders turn focus to August jobs report

Treasury yields fell across much of the curve on Monday, as traders turned their attention to a crucial August jobs report due at the end of the week.

On Friday, Federal Reserve Chairman Jerome Powell left unclear the timing of an announcement on tapering bond purchases this year, which was seen as a catalyst for driving investors into both stocks and bonds to kick off the week.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.278%

fell 1.284%, down from 1.311% at 3 p.m. Eastern on Friday. Yields and debt prices move in opposite directions.

The 2-year note
TMUBMUSD02Y,
0.207%

yielded 0.203%, down from 0.215% at the end of last week.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
1.897%

was at 1.899%, down from 1.917% late Friday.

What’s driving the market?

Powell’s ambiguity around the start date of any tapering in bond purchases this year is giving investors plenty of confidence that continued easy-monetary policy will be in place for at least weeks, if not months.

On Friday, the chairman said he was in favor of beginning to scale back the Fed’s monthly asset purchases before the end of the year, but was vague about the timetable. He also emphasized that the start of tapering shouldn’t be read as a signal about the timing of rate increases.

The lack of specifics from Powell is a big reason why money continued to flow Monday into Treasurys and U.S. stocks, with the S&P 500 SPX, 0.57% and Nasdaq Composite COMP, 1.01% indexes touching fresh intraday record highs, some analysts said. The yield on the 10-year note has continued to pull back since Powell’s remarks Friday, though it posted the biggest weekly rise since June last week.

Read: How Powell’s Jackson Hole remarks have refreshed a rally in both stocks and bonds

Analysts said Powell’s remarks underline the importance of near-term economic data in determining when tapering is likely to begin, ensuring a sharp focus on Friday’s August jobs report. But for now, investors interpreted his comments as a continuation of easy policy until at least the Fed’s next meeting in three weeks, and possibly the next few months.

In data releases, pending-home sales slid for a second month in a row, though it is too early to say whether that’s a sign of a cooling market. Pending-home sales fell 1.8% in July compared with June, the National Association of Realtors reported Monday. Economists polled by MarketWatch had projected a 0.5% increase.

Meanwhile, Ida was downgraded from a hurricane to a tropical storm as its top winds slowed over Mississippi on Monday, a day after making landfall on the Gulf Coast with winds of 150 miles an hour, tying it for the fifth strongest hurricane to hit the U.S. mainland.

The storm sent gasoline futures jumping as it forced the closure of Gulf Coast refineries and the shutdown of a key pipeline that transports fuel to the Southeast. Oil prices made modest moves in either direction.

What are analysts saying?

“Given Powell’s speech, Friday’s jobs report could well determine 1) when tapering starts and 2) how quickly it occurs, given it is the last jobs report before the Sept. 22 Fed meeting,” wrote Tom Essaye, founder of Sevens Report Research, in a note. “So, that makes Friday’s jobs report the most important one in years, frankly speaking and…the bottom line is that the jobs report has to be Goldilocks enough that it doesn’t cause the Fed to accelerate tapering,” he said.

“Tapering and the end of QE doesn’t necessarily mean long term rates will move higher,” Dimitri Delis, managing director of Piper Sandler Cos., said in a note Monday. “In the previous period of tapering (12/2013-10/2014), yields fell during the implementation period. Also over the last 12 years, following the termination of each QE program the 10yr Treasury rate has always moved lower. If history repeats itself, tapering and the end of QE4 could lead to lower rates again.”

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