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Bond Report: Treasury yields inch lower, see muted action for the week

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U.S. government bond yields were edging lower Friday, wrapping up a week that hasn’t seen a substantive change of trend as investors hunt for clarity on how to best position for an expected rise in inflation.

How are Treasurys performing?
  • The 10-year Treasury yield
    TMUBMUSD10Y,
    1.613%

    traded at 1.628%, off 0.3 basis point from Thursday at 3 p.m. Eastern Time.
  • The 30-year Treasury bond
    TMUBMUSD30Y,
    2.320%
    ,
    known as the long bond, was yielding 2.336%, edging 0.5 basis point lower.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.153%

    yield slipped to 0.149%, from 0.151%

For the week, the 10-year Treasury rate was down 1.1 basis points, the long bond was off 2.1 basis points, while the 2-year note was little changed from last Friday’s finish at 0.151%.

Bond prices move in the opposite direction to yields.

What’s driving the market?

The bond market has been mostly subdued in recent weeks as investors wrestle with the prospect of rising inflation. The 10-year Treasury has been trading in a range between 1.48% and 1.68%, since April’s surprise reading on the employment situation in the U.S., where gains for the month were a weaker-than-expected 266,000, far lower than the roughly 1 million jobs forecast.

The Fed has signaled that it would be patient in waiting for substantive progress in the economic recovery before tapering a key asset-purchase program, but Wednesday’s minutes from the central bank’s April meeting was interpreted by some as a table-setter for an eventual removal of easy-money policies.

In addition to holding benchmark rates at a range between 0% and 0.25%, the Fed is buying $80 billion of Treasurys and $40 billion of mortgage-backed securities each month to smooth financial market conditions and support the economy. 

Fixed-income strategists and investors might look to economic data for a catalyst, with IHS Markit’s flash PMIs, which tracks economic trends in the manufacturing and service sectors, due at 9:45 a.m. Eastern Time. After that report, a reading on existing home sales for April is due at 10 a.m.

The next important reading of data may not be until May 28, when the Fed’s preferred inflation measure, PCE, or personal consumption expenditure, is released.

Meanwhile, a pair of Fed speakers are on deck Friday.

Dallas Fed President Robert Kaplan and San Francisco Fed President Mary Daly due to speak on Friday. Kaplan, in an interview with MarketWatch earlier this month, advocated for beginning a conversation about the central bank’s taking its foot off the gas in its support for the economy. Daly has said it is too soon to begin such discussions.

What are strategists saying?

“We tested that upper end following the release of the minutes but failed to sustain a move higher in rates. We are respecting the range until we get more data,” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities.

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