Bond Report: Treasury yields extend rise after Fed policy statement

Treasury prices declined Wednesday, pushing up yields again after the Federal Reserve left interest rates on hold and did nothing to discourage expectations it will tighten monetary policy when it meets in March.

How are Treasurys performing?

Yields, which move inversely to debt prices, initially trimmed their rise following the announcement but then crept higher. The 2-year note yield TMUBMUSD02Y, +1.33% the most sensitive to changes to monetary policy, rose 2 basis points to 2.149%%. The yield on the 10-year Treasury note TMUBMUSD10Y, -0.17% rose 2.73 basis points to 2.749%, as it continued to revisit territory last seen in April 2014.

The 30-year bond yield TMUBMUSD30Y, -1.06% however, retreated to 2.972%, compared with 2.980% late Tuesday, which marked its highest since March 2017.

Bond prices move inversely to their yields.

What is driving the market?

In the last meeting headed by Chairwoman Janet Yellen, who will hand the reins to Jerome Powell on Feb. 3, the Fed signaled it is on track to raise rates at its next meeting in March after policy makers decided unanimously to leave the fed-funds rate unchanged in a range of 1.25% to 1.5%. The policy statement was read as relatively hawkish, asserting that inflation would pick up in coming months.

Earlier, payroll-processing firm ADP said the U.S. economy added 234,000 private-sector jobs in January versus expectations by economists for 185,000. Traders look to the data for clues to official jobs data, though economists note the ADP figures have a mixed record in anticipating the private-sector portion of the Labor Department jobs tally.

The Treasury Department said it plans to increase the size of this quarter’s bond and note auctions by $42 billion to meet increased funding needs. Treasury said that it would only be able to fund the government through the end of February unless Congress raises the debt ceiling. Treasury will increase the size of 2-year and 3-year note auctions by $2 billion a month this quarter. In addition, Treasury will increase the auction sizes to each of the next offerings of 5-year, 7-year, 10-year notes and the 30-year bond auctions starting in February.

What are strategists saying?

“The changes to the statement were fairly modest, but the markets didn’t really need much further encouragement. Fed funds futures have risen almost continuously since last September and, at this stage, a March rate increase is pretty much fully priced in,” said Michael Pearce, senior U.S. economist at Capital Economics, in a note.

“The debt limit continues to constrain Treasury’s flexibility in financing and they urge Congress to raise the debt ceiling as soon as possible. Treasury continues to expect that they can fund the government through the end of January. The increases in coupon supply will eat into available borrowing authority and will further limit bill issuance until the debt ceiling is raised,” said Thomas Simons, senior money market economist at Jefferies, in a note.

What other data are in focus?
  • The Labor Department said the cost of employing the average American worker rose 0.5% in the final three months of 2017 and were up 2.6% in the 12 months ending in December. That’s the biggest 12-month gain for the employment cost index in almost three years.
  • The Chicago purchasing managers index slipped 2.1 points to 65.7 in January, pulling back from a nine-year high in December. A reading of more than 50 indicates improving conditions.
  • U.S. pending home sales rose 0.5% in December, the highest readings since March.
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