Bond Report: 10-year Treasury yield sees biggest one-day drop in more than 3 months

Treasury prices rose, pulling yields lower, on Wednesday after investors plowed back into long-term debt, helping to reverse last week’s selloff.

What are Treasurys doing?

The yield for the benchmark 10-year Treasury note TMUBMUSD10Y, -2.70%  slipped 5.4 basis points to 2.412%, the steepest one-day decline since Sep. 5. The 30-year bond yield TMUBMUSD30Y, -2.70% dropped 6.7 basis points to 2.746%, the biggest single-day drop since Dec. 1.

The 2-year note yield TMUBMUSD02Y, -1.66% ticked lower 0.4 basis point to 1.899%, edging away from the highest levels seen since Sep. 2008.

Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

Wednesday’s trading saw a turnaround of last week’s action when investors shed their holdings of government paper. The Republican’s rapid progress in passing the tax bill sent yields climbing on fears the fiscal stimulus could spur a sudden rise in inflation and force the Federal Reserve to raise interest rates more aggressively in 2018—a bearish scenario for bonds.

However, analysts said last week’s selloff was likely overdone, with market participants piling back into long-term Treasurys. One lingering concern is the yield curve, a line tracing a bond’s maturities and its yields. Flattening of the so-called curve, narrowing the gap between short-dated yields and its long-dated counterparts, is often viewed as a harbinger of economic woe.

See: Steepening yield curve slams one of the bond market’s biggest bets

Meanwhile, the Treasury Department drew tepid demand for an auction of $34 billion of 5-year notes. Though auctions of government paper can affect trading for debt in the overall market, the poor showing failed to deter buying.

What did market participants say?

“Last week’s selloff set up a rebound into this week, because it got oversold. People that saw the big spike [in Treasury yields] last week, said let’s stay short towards the year-end. They looked good yesterday, but not so good today,” said Jim Vogel, interest-rate strategist for FTN Financial.

He added short sellers may have contributed to the bullish trading by “short-covering”, or when an investor who has borrowed a security to bet against it is later forced to buy back the asset.

What else is on investors’ radar?

The Citigroup Economic Surprise Index is at its highest levels since early 2012. A higher reading shows economic data has performed better than economists’ expectations and could suggest yields have room to climb.

The White House’s search to fill in the vacant vice chairman post at the Federal Reserve’s Board of Governors. Richard Clarida, who works at money manager Pimco, and Lawrence Lindsey, a former governor at the board, were both interviewed for the role.

Consumer confidence fell to 122.1 in December, a month after touching its highest levels since 2000. Though it fell below the median forecast of 127.5 from MarketWatch economists, the reading remains at historically elevated levels. Meanwhile, the National Association of Realtors reported pending home sales grew by 0.2% in November.

What other assets are on the move?

Key commodity prices established several records but weren’t able to perk up long-term yields, subject to the vagaries of inflation expectations. Copper prices HGH8, -0.11% surged to their highest level since mid-2014, while crude futures CLG8, -0.67%  fell but hung near a 2 ½-year high. Commodity prices can be used to gauge the outlook for inflation.

The yield for the German 10-year bond TMBMKDE-10Y, -8.69% or the bund, fell 3.9 basis points to 0.378%.

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