Treasury prices fell slightly on Thursday, nudging yields higher, after the House of Representatives passed a budget resolution seen as a necessary step toward enacting tax cuts.
What did Treasury yields do?
The 10-year Treasury yield TMUBMUSD10Y, -0.08% rose 2 basis points to 2.352% from 2.332% on late Wednesday, according to WSJ Market Data Group. The 2-year Treasury note yield TMUBMUSD02Y, +0.03% rose 2 basis points to 1.495%, versus 1.479%. The 30-year Treasury bond yield TMUBMUSD30Y, -0.15% added a basis point to 2.893%, from 2.878%. Bond prices move inversely to yields.
What is driving markets?
Tax cut hopes stoked appetite for stocks and other assets perceived as risky at the expense of Treasurys. The House passed a $4.1 trillion budget in the afternoon, which analysts said may lead to a revamp of the U.S. tax code. The reflation trade hinges on the ability of President Donald Trump’s pro-growth agenda to boost growth and inflation, which wears away the worth of bond’s fixed-interest payments.
Investors are also bracing for labor-market data on Friday that could help guide the Federal Reserve’s policy plans and influence trading in government paper. Market participants grappled with concerns that a Catalan independence vote could stir further trouble for Spain and the viability of the European Union, as analysts say it could encourage other regional separatist movements to seek a divorce from other eurozone member nations.
What did market participants say?
“Part of the action was driven by the risk-on environment we’re in,” said Marvin Loh, senior fixed-income strategist at BNY Mellon. “But it’s a combination of a lot of things. The data has been better, and some of the Fed names coming up are hawkish, so maybe there’s some people positioning around that.”
“The [factory orders] number are suggesting some upside risk to fourth-quarter GDP, largely on the back of healthy investment in equipment,” said Sal Guatieri, senior economist for BMO Capital Markets.
What are Fed speakers saying?
- Fed Gov. Jerome Powell said additional regulation wouldn’t always be the “best answer” to safeguarding financial markets, reported Reuters. Although his remarks didn’t focus on economic and monetary policy, investors are monitoring his view on financial regulation as a barometer for his chances of becoming the Fed chair.
- Philadelphia Fed President Patrick Harker, a voting member this year of the rate-setting Federal Open Market Committee, said the Fed would likely raise rates in December. Traders in the fed-futures market are pricing in an 82.7% chance of another quarter-percentage point rate increase this year, according to CME Group’s FedWatch tool.
- San Francisco Fed President John Williams, nonvoting member, said the central bank should stay the course and raise rates, but said the terminal point was much lower as long-term growth subsides, reported Reuters.
- Kansas City Fed President Esther George, non-voting member, will speak on the U.S. labor market at 4:30 p.m. Eastern.
What economic data are on investor’s radar?
- Weekly jobless claims for the week ending Sep. 30 fell 12,000 to 260,000. Economists surveyed by MarketWatch have placed a median forecast of 265,000.
- The trade deficit for August narrowed 2.7% to $42.4 billion, an 11-month low. A narrowing trade gap will provide a boost to fourth quarter GDP numbers. Economists had expected the trade gap to come in at $42.6 billion.
- Factory orders for August rebounded to 1.2% from a 3.3% drop in July. Economists forecast it to rise 1.1%.
What other assets are on the move?
European bonds have rallied after an auction for Spanish government paper saw strong appetite, easing concerns that Catalan tensions would hammer its bond market. The French 10-year TMBMKFR-10Y, +0.00% fell a basis point to 0.735%, while the Spanish 10-year TMBMKES-10Y, +0.00% fell 9 basis points to 1.699%. The German 10-year Treasury yield TMBMKDE-10Y, +0.00% was at 0.454%, compared with 0.452% on Wednesday.
On Wednesday, Ireland issued its first negative-yielding government bond, meaning investors will have to pay to own the sovereign paper if they hold it until maturity. Ireland’s 5-year note TMBMKIE-05Y, +0.00% yielded negative 0.144%.