Bond Report: Treasury yields suffer largest weekly fall in a month, as stocks stage a rebound
Treasury yields mostly rose on Friday to snap a weeklong slump after a surge in equities offset New York Federal Reserve President James Bullard’s comments suggesting the central bank could rein in its “aggressive” monetary-tightening schedule in light of weak economic data.
The yield for the 10-year Treasury note TMUBMUSD10Y, +0.00% rose 1 basis point to 2.243%, parings its decline of 8.8 basis points this week, marking its largest weekly decline since the period ended April 13, according to Dow Jones data.
Bond prices move inversely to yields; one basis point is one hundredth of a percentage point.
The 2-year Treasury note TMUBMUSD02Y, +0.00% gained 1.2 basis point to 1.278%, while the yield for the 30-year Treasury, or the long bond, TMUBMUSD30Y, +0.00% edged off 0.2 basis point to 2.904%, extending its five-day drop of 8.8 basis points, also its steepest weekly yield drop since mid-April.
Treasury yields followed stocks higher as a brief quiet settled over the White House, with the S&P 500 index SPX, +0.68% climbing 0.67% to 2381.6 points on Friday. Yields tend to follow stocks because stocks and bonds represent opposite poles on a continuum of risk. So if investors are bullish on economic growth, stocks will rally at the expense of bonds. Albeit, prices for both assets have recently moved alongside each other.
In the past week, bonds have mostly rallied as analysts feel controversy swirling around the White House may prevent Trump from delivering on a raft of fiscal stimulus policies, which would buoy inflation and hurt the value of bond’s fixed payments. President Donald Trump is fighting back against allegations that members of his election campaign interacted with Russian officials.
The spread between the 2-year note and the 10-year note, typically used to plot the so-called yield curve, narrowed 7.4 basis points in the last five days. That narrowing, between yields on short-dated government paper and its longer-dated counterpart, tends to be viewed as a sign that investors are bearish on the economic outlook and cutting forecasts for higher consumer prices.
“Markets are repricing as the odds of a tax-reform bill are falling. They are surmising that the Trump economic agenda is now injured. They see Congress as likely to be bogged down in investigations and hearings. They see business persons and investors going to the sidelines because they do not know what the new rules will be,” said David Kotok, chief investment officer of Cumberland Advisors, in a Friday research note.
But yields pared back in late afternoon trading after reports from the Washington Post showed the Russian probe had reached a senior White House official, a sign that the Federal Bureau Investigation’s inquiry could extend to Trump’s inner circle.
Traders also focused on speeches from U.S. central bank officials to gauge whether the Federal Reserve will hike rates in June amid heightened market turbulence. St. Louis Fed President James Bullard, a nonvoting member of Fed cast doubt on two further rates hikes this year as the current timetable for monetary tightening was “overly aggressive relative to actual incoming data on U.S. macroeconomic performance.” But Treasury yields appeared to ignore his remarks.
The Chicago Mercantile Exchange’s FedWatch tool shows bond investors expect a 73.8% chance of June rate hike, compared with 87.7% in May 10. The prospect of higher rates tends to reduce the appeal of holding existing bonds, since newer issues would carry richer coupons.
See: Fed’s Bullard questions need for June rate hike
Looking ahead, next week the Treasury department will auction $ 26 billion worth of 2-year notes, $ 24 billion of 5-year notes and $ 28 billion of 7-year notes. New coming supply can weigh on trading for U.S. government paper.