BOND REPORT: U.S. Government Bonds Rally On Trade Jitters, Dovish Fed Minutes
May 24 2018 - 2:04PM
Dow Jones News
By Sunny Oh
Treasury prices rose, pushing yields lower, on Thursday to
extend their rally after trade concerns and minutes from the
Federal Reserve's recent meeting stoked appetite for U.S.
government paper.
What are Treasurys doing?
The 10-year Treasury note yield fell 2.2 basis points to 2.981%,
pushing below the key 3% level. The 30-year bond yield fell 3.8
basis points to 3.131%.
The 2-year note yield, sensitive to shifting expectations for
monetary policy, was down 1.6 basis points to 2.512%. The maturity
slid 4.2 basis points on Wednesday, its largest one-day drop in 11
weeks.
Bond prices move in the opposite direction of yields.
What's driving markets?
Trade fears are back on the agenda, stoking demand for haven
assets and government bonds, after President Donald Trump said he
would consider raising tariffs on imported cars to up to 25%
through national-security laws. This would pit the U.S. against its
major allies like Japan and Germany, which are leading car
exporters.
Trump also said he was canceling the planned June 12 Singapore
summit with North Korean leaders
(http://www.marketwatch.com/story/trump-today-president-warns-us-has-massive-nuclear-capabilities-as-he-calls-off-summit-with-north-korea-2018-05-24).
He warned North Korea about the U.S. "massive" nuclear
capabilities, saying the U.S. was ready to respond to "foolish"
acts.
Though the minutes from the Fed's May 1-2 meeting were released
on Wednesday, traders continued to digest their implications for
monetary policy. With a growing consensus that the minutes show
policy makers are taking a more dovish approach, some say this
should see the central bank act less aggressively even if inflation
does overshoot its 2% target. Traders in the fed fund futures
market trimmed the chance of a fourth rate increase this year to
41.2% from around 51% the week before, according to CME Group data
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/?redirect=/trading/interest-rates/fed-funds-flash.html).
See: Trump administration mulls tariffs of up to 25% on auto
imports
(http://www.marketwatch.com/story/trump-administration-mulls-tariffs-of-up-to-25-on-imported-autos-2018-05-23)
The bond market took down the last of the Treasury auctions this
week. Investors showed strong appetite for the $30 billion 7-year
note bond sale, with indirect buyers, a proxy for foreign demand,
snapping up a 65.5% share, above the average of 63.5% in the last
six auctions.
What did market participants say?
"As with the beginning of 2018, bond market views still divide
into three, roughly equal camps. The first is the most vocal -- the
Fed is behind today and when it catches up rates will really return
to normal," said Jim Vogel, interest-rate strategist at FTN
Financial.
"Next group sees higher rates until inflation is held in
control, basically whatever it takes from monetary policy to keep
it under 2.1%. This idea provides the impetus behind the unusual
degree of curve flattening at the long end. But when the second
group hears a cascade of hawkish Fedspeak, it pulls away from
Treasurys and rates rise due to momentum selling from vocal true
believers. That's what drove rates from late April through last
week -- the first two groups were in sync. Now, if the Fed is not
worried about inflation rising on a sustained basis, there is no
rush to a 3.5% target," said Vogel. "Oh and the third group of
agnostics? They remain content to earn higher rates and wait for
additional information, say from emerging market distress for
example."
What's on investors' radar?
Senior Fed officials sounded off on the eventual neutral
interest rate, the rate at which monetary policy neither stimulates
nor slows the economy. The current fed-funds rate is 1.50% to
1.75%.
Atlanta Fed President Raphael Bostic said the neutral rate lied
around 2.25%-2.75%, in an interview with CNBC. Dallas Fed President
Robert Kaplan said
(https://www.cnbc.com/2018/05/24/feds-kaplan-sees-another-four-rate-hikes-or-so-before-central-bank-finishes-its-job.html)
the central bank could raise interest rates four more times before
hitting the neutral rate.
Intial jobless claims rose 11,000 to 234,000 for the seven days
ending in May 19
(http://www.marketwatch.com/story/jobless-claims-rise-to-7-week-high-of-23400-2018-05-24).
Existing home sales for April ran at an annual pace of 5.46 million
in April
(http://www.marketwatch.com/story/existing-home-sales-tumble-as-supply-crunch-squeezes-hard-2018-05-24).
Economists surveyed by MarketWatch had forecast a 5.50 million
pace.
What are other assets doing?
The 10-year German government bond yield was down 2.9 basis
points to 0.469%. German debt often serves as a barometer of
investors' perception of the eurozone's viability.
The 10-year Italian bond yield was down 1.7 basis points to
2.400%, while the Spanish 10-year yield fell 5.0 basis points to
1.394%.
(END) Dow Jones Newswires
May 24, 2018 14:49 ET (18:49 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.