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Bond Report: Treasury yields rise on Friday but end mixed in holiday-shortened week

Treasury yields rose across the board Friday as data showed that U.S. wholesale inflation moderated in August but remained elevated, though yields were little changed for the week.

What yields are doing

The 10-year Treasury note yields
TMUBMUSD10Y,
1.335%

1.340%, versus 1.300% on Thursday at 3 p.m. Eastern Time.

The 30-year Treasury bond rate
TMUBMUSD30Y,
1.932%

was at 1.933%, after trading at 1.898% a day ago.

The 2-year Treasury note yields
TMUBMUSD02Y,
0.220%

0.217%, up slightly from 0.214% on Thursday.

For the week, the 2-year yields posted a weekly climb of 1.1 basis points, the 10-year Treasury note added 1.8 basis points, marking the first straight weekly advance, while the 30-year slipped 0.9 basis point, according to Dow Jones Market Data.

What’s driving the market?

Treasury yields remain largely rangebound, even as wholesale inflation remained elevated, though off July’s highs.

The U.S. producer price index rose 0.7% in August, above expectations for a 0.6% rise, but down from a 1% jump in July. Overall producer prices were up 8.3% in August from a year earlier though, up from 7.8% in the prior month. That’s the largest gain since the data was first collected in November 2010.

Meanwhile, a recent report from WSJ indicates that Federal Reserve officials could begin setting the stage for the tapering of its monthly bond purchase program of $120 billion in Treasurys and mortgage-backed securities at its Sept. 21-22 meeting, with an announcement of its plans at the following meeting in early November.

The report comes as a number of voting members of the Fed’s policy committee voice support for rolling back the monetary accommodation that provided liquidity to markets during the worst of the pandemic.

On Thursday, Federal Reserve Gov. Michelle Bowman said the labor market was “very close” to the hurdle needed for the central bank to start slowing its bond purchases.

On Friday, Cleveland Fed President Loretta Mester said that the August employment report didn’t alter her view that the central bank should begin to slow down its monthly purchases of bonds this year.

Meanwhile, economists are predicting that the Fed will begin raising interest rates, which currently stand at a range between 0% and 0.25%, next year, according to a survey by the Financial Times’ Initiative on Global Markets at the University of Chicago Booth School of Business. An increase in benchmark interest rates next year would be far sooner than the 2023 projections that Fed officials penciled in back in the summer.

Looking ahead to next week, investors are expecting pressure on Treasury yields from corporate bond issuance.

Reuters reported that U.S. investment-grade corporate bond deals soared to a record high this week, with investment-grade bond offerings on track to surpass a record 36 new issues, amid low rates and that trend is expected to continue into next week.

What analysts are saying

 “Treasuries bear steepened mid-morning to accommodate hedging for more corporate supply next week,” wrote Jim Vogel, executive v.p. at FHN Financial, in a research note. “ Volume has been active but not large enough to handle the anticipated size of next week’s issuance calendar. It makes sense for corporate treasurers to forge ahead on this week’s momentum and then reduce sales as traders wait for [Federal Open Market Committee] guidance the week of September 20. The past week of the quarter could pose market issues as Congress rushes to complete a reconciliation bill,” he said.

“Near-term upside for US growth momentum and more hawkish Fed pricing should lift bond yields,” writes Sebastian Raedler, investment strategist at BofA Global Research, in a note published on Friday. “We think the loss of US growth momentum since mid-Q2 has been a key driver of the 40bps pull-back in the US bond yield from its March peak, with rates closely tracking the decline in US macro surprises,” he wrote. 

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