TLT iShares 20 plus Year Treasury Bond

By Sunny Oh

The 10-year Treasury yield close to psychologically significant 2% level

U.S. Treasurys on Friday stabilized, capping an overall decline in long-dated yields, which saw rates on government paper test fresh lows on the back of weakening inflation expectations, President Donald Trump's waning pro-growth agenda, rising geopolitical risks from North Korea--and a steady stream of flows from yield-hungry foreign investors.

The moves put the 10-year Treasury yield on the verge of slipping below 2%, a psychological and technical level that could trigger a further decline as uncertainty about the economic impact of Hurricane Irma and other storms in the Atlantic weigh on appetite for assets perceived as risky, fostering buying in Treasurys.

For the day, yields for key maturities were flat, keeping intact sizable declines. The 10-year Treasury note yield slipped 10 basis points for the five-day stretch to 2.058%, the largest weeklong decline since April 13.

Similarly, the 2-year Treasury more sensitive to the vagaries of monetary policy, posted a weeklong fall of 7.5 basis points to 1.270%. The 30-year bond yield dropped about 9 basis points to 2.678%.

Bond buying, which pushes prices higher and yields lower, subsided somewhat later Friday, helping yields to come off intraday lows.

Market participants attributed some of those moves to selling ahead of next week's rush of new issuance, which can pressure prices on outstanding government paper. The Treasury Department will auction more than $56 billion of 3-year, 10-year and 30-year government paper in the coming week.

"There's some setting up for the influx of government supply next week," said Tom di Galoma, managing director of Treasurys trading for Seaport Global Securities.

European yields ended mostly lower on the week even as European Central Bank President Mario Draghi on Thursday delayed an announcement of tapering the ECB's EUR60 billion asset-purchase program, indicating that the central bank would broach that topic at the October policy meeting.

The German 10-year government bond yield rose around 2 basis points to 0.315% on Friday, compared with 0.379% at the start of the week.

Yields have remained depressed as geopolitical concerns over a possible test launch of an intercontinental ballistic missile by North Korea this weekend unsettled investors. Market participants were also worried that damages from Hurricane Harvey and Irma could deal a blow to the economy while scrambling coming data. Doubts about President Trump's business friendly agenda coming to fruition also have helped contribute to depressed yields.

And with the chance of an interest-rate increase rapidly diminishing, investors are snapping up longer-dated bonds that would otherwise be pummeled during an aggressive tightening cycle. Traders in the fed-fund futures market downgraded the chances of the Federal Reserve raising rates as low as 20% from the 40% seen a few weeks ago, CME Group data show.

A popular exchange-traded fund specializing in long-dated Treasurys on Thursday attracted the most money in a single day since May 2011 (http://www.marketwatch.com/story/long-dated-treasury-etf-sees-largest-inflows-since-may-2011-2017-09-08), data from FactSet shows. The iShares 20+ year Treasury Bond ETF (TLT) drew in $664.7 million of investment, more than doubling the total amount of inflows this year.

Read: Death toll rises to 10 as Hurricane Irma barrels through Caribbean, heads for Florida (http://www.marketwatch.com/story/death-toll-rises-to-8-as-hurricane-irma-barrels-through-caribbean-heads-for-florida-2017-09-07)

Those betting on a dovish central bank might have taken some cues from New York Fed President William Dudley's speech on late Thursday (http://www.marketwatch.com/story/feds-dudley-shows-no-signs-of-wavering-from-support-for-december-interest-rate-hike-2017-09-07). He appeared to break from past form when he acknowledged the troubling persistence of inflation slipping below the central bank's 2% target.

But his comments on easy financial conditions and lack of concern over undershooting the Fed's inflation target suggested it was more of the same, all part of his steady campaign "to put a December rate hike on the table," wrote Ward McCarthy, chief financial economist for Jefferies.

Dudley is closely watched by analysts who see him as a bellwether for policy shifts in the central bank.

(END) Dow Jones Newswires

September 11, 2017 07:48 ET (11:48 GMT)

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