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Bond Report: 10-12 months Treasury Yield Rise After Fed Coverage Replace

Long-term US Treasury bond yields rose inches Thursday morning, and 2-year yields contributed slightly to their rise.

Investors continue to monitor developments at China's Evergrande Group, with reports that the Chinese government will arrive at the last minute to bail out the heavily indebted property developer when its debts mature.

What Treasury Yields Do

The yield on the 10-year government bond
TMUBMUSD10Y,
1.366%
1.364% compared to 1.332% on Wednesday at 3 p.m. Easter time.

The interest rate on 30-year government bonds
TMUBMUSD30Y,
1,873%
was 1.869% versus 1.848%, up 1.2 basis points.

The 2-year government bond
TMUBMUSD02Y,
0.242%
was 0.243%, compared with 0.240% on Wednesday when it posted its largest one-day increase since June 23.

What is driving the market?

On Wednesday, the widely observed 2- to 10-year yield spread, as well as the 5- to 30-year yield gap, flattened after the Fed's monetary policy update. The moves reflected traders' expectation that the central bank will not get as far as it thinks it can when it finally raises interest rates. The curve flattened despite policymakers targeting an earlier than expected rate hike in 2022, saying a cut in monthly bond purchases "may soon be justified".

The US Federal Reserve's meeting set the stage for the announcement of a throttling at the next central bank meeting in November, which will see monthly purchases of $ 80 billion in US Treasury bonds through December away.

The 2- to 10-year and 5 to 30-year spreads hardly changed on Thursday as yields rose across the board called for an initial increase in the key rate from currently 0% to 0.25% next year .

Others point out that despite the reduction in bond purchases, the Fed is still buying significant amounts of assets, with total assets of around $ 8.5 trillion as of Sept. 13. An update to the central bank's balance sheet is due at 4:30 p.m. Thursday.

Meanwhile, the Bank of England left its monetary policy unchanged, but lowered its forecast for economic growth in the third quarter. The BOE unanimously decided to keep rates at 0.1% and its two youngest members were 7-2 in favor of maintaining their bond purchase program. That news came when the Central Bank of the Republic of Turkey made a surprise decision to cut interest rates, dropping them from 19% to 18%.

In data releases, weekly unemployment benefit claims in the US soared to a one-month high in what appears largely to be a case of California catching up a large backlog on claims. Initial jobless claims rose by 16,000 to 351,000 in the week ending September 18, the government said on Thursday. Economists polled by the Wall Street Journal had estimated the new claims would amount to 320,000.

The US services sector's IHS Markit hit a 14-month low and manufacturing fell to a 5-month low as US private companies signaled a slower pace of expansion. Looking ahead, at 1:00 p.m., investors will be closely watching an auction of $ 14 billion ten-year Treasury inflation-linked securities, or TIPS.

Progress in Congress in raising the US federal debt limit is also being monitored by fixed income investors. On Wednesday, six former US Treasury officials warned the Democratic and Republican governments that failure to raise the debt ceiling in a timely manner and US default could seriously damage the economy and national security.

What analysts are saying

“TIPS are a great allocation [US Treasuries] when the Fed is debating what to do against inflation, but less so when the Fed signals the first steps towards tighter policy – even if the tightening is still 12 months away . Today's auction will take a fresh look at the balance between reflation fears and the overbought conditions that have dominated the TIPS market all year, ”wrote Jim Vogel Executive v.p. at FHN Finances.

“Even with a rejuvenation, we expect additional purchases of $ 600 billion to $ 700 billion. Think about it in the historical context of the Fed's QE, ”writes Gregory Faranello, executive director of AmeriVet Securities and head of US Interest Rate Trading and Strategy.

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