Long-dated U.S. Treasury rates edged higher Tuesday, with appetite for bonds cooling even amid a round of weaker-than-expected housing data, which undercut the positive tone in equities.
How are Treasuries trading?
The 10-year Treasury note yields
rose to 1.641%, up 0.2 basis point from yesterday’s levels at 3 p.m. Eastern Time.
The 30-year Treasury bond
known as the long bond, was yielding 2.363%, up 1 basis point.
The 2-year Treasury note
yielded 0.151%, off 0.2 basis point.
Bond prices fall as yields rise and vice versa.
What’s driving the market?
Bets on inflation colored trading in the Treasury market as the U.S.’s move into the recovery phase of the pandemic deepens.
Evidence of a better economy following the coronavirus outbreak that gripped the country early last year has supported the view that the Federal Reserve will raise benchmark interest rates from a 0%-0.25% range earlier than the Fed’s own projections for a move by around 2024.
Traders are positioning for higher yields, as bond prices fall, even if Tuesday’s moves in Treasuries appeared to be relatively muted.
However, data on housing came in weaker than expected, with a report on U.S. home builders starting construction on homes coming in at a seasonally adjusted annual rate of 1.57 million in April, representing a 9.5% decrease from the previous month’s lowered figure, the Census Bureau said.
Permitting for new homes in April occurred at a seasonally adjusted annual rate of 1.76 million, up 0.3% from March and 61% from a year ago.
Meanwhile, data from the U.S. Treasury showed foreign investors mostly kept rate moves in check this spring, buying a record amount of U.S. government debt in March. Foreign investors bought $118.87 billion in Treasuries in March.
However, foreign holdings of Treasuries overall declined to $7.028 trillion in March from $7.098 trillion in the previous month, representing the third straight monthly decline.
Larry Summers on Tuesday continued his criticism of the Fed’s easy-policy stance, arguing, in remarks at an event hosted by the Atlanta Federal Reserve, that the central bank’s focus on healing the jobs market is misplaced amid evidence of labor shortages. Summers is the former secretary of the Treasury under Bill Clinton and director of the National Economic Council under Barack Obama.
“I think the prospects for avoiding turbulence over the next several years, both in the real economy and financial markets, would be substantially greater if there was a sense that monetary policy authorities in the United States were focused on the need to avoid overheating rather than focused on the need to reassure people that they won’t focus on overheating,” Summers said.
Investors will be eager to parse minutes from the Fed’s most recent policy meeting, which will be released Wednesday at 2 p.m. ET.
What are fixed-income strategists saying?
“We agree with the Fed’s view that the current wave of Inflation will be high in the near-term but ultimately Transitory,” wrote Gautam Khanna, senior portfolio manager at Insight Investment, which oversees over $1 trillion in assets.
“It is a function of base effects (the CPI figure is being compared to a year ago—during the height of lockdowns), pent up demand and supply chain friction,” writes Khanna.
“But How Long is Transitory? “asks the Insight portfolio manager. “It could be anything from two months to 18,” says the money manager, noting that uncertainty around timing may not sit well with investors, and it could stoke bouts of volatility, presenting opportunities to “buy the dips.”