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Bond Report: 10-year Treasury yield edges higher after Fed policy update

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Long-dated U.S. Treasury yields inched higher Thursday morning and the 2-year added slightly to its rise, a day after a Federal Reserve policy update when the short-dated debt registered the biggest one-day jump in three months.

Investors continue to watch developments with China’s Evergrande, with reports suggesting that the Chinese government would only come to bailout the heavily leveraged property developer at the last minute as its debts come due.

What Treasury yields are doing
  • The 10-year Treasury note yields
    TMUBMUSD10Y,
    1.345%

    1.333%, compared with 1.332% on Wednesday at 3 p.m. Eastern Time.
  • The 30-year Treasury bond rate
    TMUBMUSD30Y,
    1.836%

    was at 1.836%, versus 1.848%, up 1.2 basis points.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.246%

    was yielding 0.247%, compared with 0.240% on Wednesday, which marked the largest daily yield climbing since June 23.
What’s driving the market?

On Wednesday, the widely watched spread between 2- and 10-year rates flattened—as did the gap between five- and 30-year yields, occurring after policy makers had penciled in a sooner-than-expected rate increase for 2022, and said a tapering of monthly bond purchases “may soon be warranted.”

The Federal Reserve meeting has set the stage for an announcement of tapering at the next central bank meeting in November, which could see reductions of the monthly purchases of $80 billion in Treasurys and $40 billion in mortgage-backed securities kick off by December, especially if the labor market maintains its trajectory of improvement from the COVID-19 pandemic.

Yields are seen eventually rising against this backdrop but some analysts attributed the reaction to the Fed decision to a dovish interpretation, considering fewer-than-expected policy makers called for a first policy interest rate increase next year from the current 0% to 0.25% range.

Others note that even with tapering of bond purchases the Fed is still buying sizable amounts of assets, with its balance sheet at around $8.5 trillion, as of Sept. 13. An update on the central bank’s balance sheet is due at 4:30 p.m. Thursday.

Meanwhile, the Bank of England kept its monetary policy unchanged but downgraded projections for the third quarter economic growth. The BOE unanimously decided to keep interest rates at 0.1%, and its two newest members were on the side of maintaining its bond purchase program in a 7-2 vote. That news came as the Central Bank of the Republic of Turkey made a surprise decision to cut interest rates, lowering them to 18% from 19%.

Looking ahead, investors will be watching for updates on U.S. economic reports, including a report on weekly jobless claims for the week ended Sept. 18, with 309,000 claims forecast by economists polled by Econoday. The Chicago Fed National Activity Index also is due at the same time.

The IHS Markit reading of U.S. service and manufacturing sectors are due at 9:45 a.m. ET.

Investors will also closely watch an auction of $14 billion 10-year Treasury inflation-protected securities, or TIPS, at 1 p.m.

Progress in Congress toward raising the U.S. federal debt limit is being closely watched by fixed-income investors. On Wednesday, six former U.S. Treasury secretaries from Democratic and Republican administrations warned that failing to raise the debt limit on time and allowing the U.S. to default could cause serious harm to the economy and national security.

What analysts are saying
  • “TIPS are a great [U.S. Treasury] allocation when the Fed is debating what to do about inflation, but less so when the Fed signals initial steps toward a policy turn tighter—even if tightening is 12 months away. Today’s auction will provide a fresh look at the balance between reflation fears and the overbought conditions that have ruled the TIPS market all year,” wrote Jim Vogel executive v.p. at FHN Financial.
  • “Even with a taper, we are looking at more buying of $600-700 billion. Think about that in historical context of Fed QE,” writes Gregory Faranello, executive director of AmeriVet Securities and head of U.S. rates trading and strategy.

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