Bond Report: 2-year Treasury yield hovers near 9-year high as Wall Street braces for higher rates

U.S. Treasurys stabilized on Tuesday, with short-dated yields holding near a nine-year high, suggesting that the outlook for a rate increase in coming weeks from the Federal Reserve has firmed for investors.

Traders also listened to comments from prominent central bankers, including Fed Chairwoman Janet Yellen, European Central Bank President Mario Draghi, Bank of Japan Gov. Haruhiko Kuroda and Bank of England Gov. Mark Carney, all speaking at a panel discussion in Frankfurt.

What are yields doing?

The 2-year Treasury note yield was at 1.687%, virtually unchanged from its level late Monday in New York. The 10-year benchmark Treasury note yield was at 2.399%, versus 2.400% in the previous session, while the 30-year Treasury yield was at 2.856%, slipping slightly compared with 2.869%.

Bond prices and yields move in opposition.

What’s driving Treasurys?

Wall Street is pricing in a nearly 100% chance that the Fed will raise interest rates when the Federal Open Market Committee next convenes at Dec. 12-13, according to CME Group data.

Those expectations have lifted short-term interest rates, the most sensitive to shifting interest-rate expectations, to their highest level in nearly a decade. However, sluggish levels of inflation and wage growth have weighed on longer-dated Treasurys, more sensitive to the inflation outlook because rising prices can chip away at a bonds fixed value.

Wall Street traders have been keenly waiting for further clues from central banks or economic reports that might offer more clarity on the prospects for inflation normalizing closer to an annual rate around 2% that most central banks deem appropriate for a healthy economy.

Investors also have been following developments in Washington tied to tax policy, with bond investors concerned that current proposals might increase the deficit and influence bond issuance.

Outgoing Fed boss Yellen said valuations for stocks are near historic highs, attributing elevated levels for stocks to the ultralow rate environment, speaking in Frankfurt. President Donald Trump nominated Fed. Gov. Jerome Powell to replace Yellen when her term as Fed chief expires in February.

What are strategists saying?

“In our view there are a number of factors to consider here. The first is that ‘safe’ government bonds, such as Treasurys, have not rallied as risk aversion has risen. This again might just reflect the very limited scale of the weakness in risk assets just recently and, if risk-aversion kicks in with a vengeance then Treasurys could soar and yields collapse,” said Steve Barrow, strategist at Standard Bank, referring to a dynamic that has seen a limited rise in yields, even as the Dow Jones Industrial Average DJIA, +0.07%  and the S&P 500 index SPX, +0.10% proxies for risk sentiment, have continued to hang near record highs.

What data and Fed speakers are ahead?

October producer prices will be released at 8:30 a.m. Eastern, with economists polled by MarketWatch forecasting a 0.1% rise for the month.

Read: Here are the seven Fed speeches that matter this week

Investors are watching a parade of Fed speakers this week, highlighted by Yellen, as well as Raphael Bostic, the new president of the Atlanta Fed.

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