Bond Report: Treasury yields edge higher as investors gear up for next year

Treasury yields rose slightly Thursday with less than 24 hours left in regular trading for 2017 after investors completed last-minute trades ahead of expectations for higher growth and inflation next year, in part because of the Republican tax cuts passed in December.

Still, trading in government paper remains subdued, as investors focus on coming data and take stock of coming monetary policy from global central bankers, including the Bank of Japan, which has hinted at tapering its easy-money stance.

The bond market will close early Friday, at 2 p.m. Eastern, and will be closed on Monday for New Year’s.

What are Treasurys doing?

The yield for the benchmark 10-year Treasury note TMUBMUSD10Y, +0.94% rose 2 basis points to 2.432%, compared with 2.412% late Wednesday in New York, when it saw the steepest one-day drop since Sept. 5, according to WSJ Market Data Group.

The two-year note yield TMUBMUSD02Y, +1.06% ticked up 1.2 basis points to 1.911%, a fresh decade-long high. The 30-year bond yield TMUBMUSD30Y, +0.33% was up a basis point to 2.756%.

Bond prices and yields move inversely.

What’s driving Treasurys

Market participants attributed at least some of Wednesday’s moves, with prices rising and yields retreating, on investors consolidating their gains in riskier assets, like stocks, into government paper.

However, new tax-policy legislation, signed into law last week, has been the biggest contributor to the recent trend of yields edging higher as investors anticipate that stimulative effect of new laws will weigh on appetite for existing bonds. Investors have raised their economic forecasts for next year as they say the weight of the tax cuts will be front-loaded, though they said the long-term benefits of the tax bill are unclear.

Meanwhile, meeting minutes from the Bank of Japan’s policy makers’s most recent gathering released Thursday indicate the central bank has started talking about the possibility of pulling back its aggressive monetary easing initiative. That would put the central bank in similar footing with the European Central Bank, which plans to taper its quantitative easing efforts starting in January.

The Federal Reserve already has hiked interest rates three times in 2017, citing improving economic conditions, although stubbornly low inflation remains a main concern.

Against the backdrop of better conditions and inflation across the globe, appetite for the safety of government bonds may wane somewhat, barring any surprise events.

What did market participants say?

“From the big picture standpoint, as we look into next year, the impact on bond yields will depend on what growth will come from tax reform. Specifically, the cut on corporate tax rates. If growth breaks out above the 2% or 2.5% range, will that be enough to spur inflation? Will that make the Fed more aggressive with its tightening?” said Craig Bishop, lead strategist of U.S. fixed income strategies at RBC Wealth Management.

What data are in focus?

Weekly jobless numbers for the week before Christmas came in at 245,000. Economists surveyed by MarketWatch were forecasting 239,000 Americans to file for unemployment benefits.

Meanwhile, the goods trade deficit widened by 2.3% in November to $69.7 billion, which could drag on fourth-quarter growth. This was followed by a jump in the Chicago purchasing managers index to 67.6 in December, the highest since March 2011.

On Wednesday, U.S. consumer confidence fell to 122.1 in December, from a 17-year high.

Which other assets are in focus?

Japanese 10-year benchmark yields TMBMKJP-10Y, +5.50% were mostly flat at 0.053%, compared with 0.054% on Wednesday, according to Tradeweb. Meanwhile, 10-year German bond yields TMBMKDE-10Y, +11.75% , known as bunds, were at 0.424%, versus 0.380% in the prior session.

Italian bonds came under pressure as President Sergio Mattarella dissolved parliament on Thursday to call a general election next March. Investors fear the popularity of anti-establishment parties could stoke sentiment against the European Union and stall reforms for one of the eurozone’s weakest and most indebted economies. The 10-year Italian government bond TMBMKIT-10Y, +1.79%  climbed 5.1 basis points to 1.958%, from 1.907% on Wednesday.

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