Bond Report: Treasury yields edge lower as Turkish currency resumes fall

Treasury yields fell Friday at the end a week of range-bound as trading as demand for U.S. government paper rose when the Turkish lira resumed its decline and weighed on risk sentiment.

The yield for the benchmark 10-year note TMUBMUSD10Y, -0.31%   fell 2.0 basis points to 2.851%. The 2-year note yield TMUBMUSD02Y, -0.79%   was down 1.2 basis point to 2.608%, while the 30-year bond rate TMUBMUSD30Y, -0.29%   shed 1.8 basis points to 3.014%. Bond prices move in the opposite direction of yields.

Investors continued to grapple with the rapid depreciation of the Turkish lira USDTRY, +5.3257%   after the troubled currency snapped its three-day bounce to slump more than 5% against the dollar. Although only a small corner of the global economy, Turkey is in the throes of a currency crisis that has inflicted rapid inflation on its citizens and ramped up the cost of debt service for its corporations, many of whom had borrowed freely in dollars and euros. Fears that the currency could continue to weaken have drawn talk of contagion, pushing investors into haven assets like Treasurys.

The country’s finance minister Albayrrak hosted a conference call on Thursday in an attempt to reassure investors. He promised that capital controls were not be on their way, refuting concerns market participants would struggle to cash out their investments and take their money out of the country’s borders. But economists say the Turkish central bank’s reluctance to raise interest rates mean the underlying policy problems remain unresolved.

See: Investors are using alternative strategies to wager against Turkish lira

Read: It isn’t only Turkey—Asia is the ‘elephant in the room’ in excessive dollar debts

Meanwhile, investors are expecting the University of Michigan’s U.S. consumer sentiment data and the Conference Board’s leading economic index at 10 a.m. Eastern.

Looking ahead for next week, investors are gearing up for the Federal Reserve’s annual Jackson Hole symposium late next week where central bankers could discuss a potential of hot issues, including the terminal point of the Fed’s balance sheet reduction plan. Fed Chairman Jerome Powell’s speech will be about “monetary policy in a changing economy,” the central bank said Thursday.

The Fed’s latest meeting minutes are due to be released Wednesday, prior to the symposium’s start, and could shed light on the issue as well. A few analysts have cited the Fed’s bond-buying and its bloated portfolio of securities for depressing U.S. long-term bond yields.

“The most interesting part of the minutes will be about the balance sheet outlook. Unfortunately, recent speeches by FOMC members suggest that there is not yet a strong consensus, so we think at most we will see the various options being laid out,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets, in a Friday research note.

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