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Bond Report: 10-year Treasury yield trades at around 2-week high

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U.S. Treasury yields edged higher Wednesday, with the 10-year at its highest level in nearly two weeks, as durable goods orders dipped in July due to weak demand for planes and as investors awaited an auction of $61 billion five-year notes.

What yields are doing
  • The 10-year Treasury note yields
    TMUBMUSD10Y,
    1.315%

    1.308%, compared with 1.289% at 3 p.m. Eastern Time on Tuesday. The 10-year Treasury rate hit its highest since Aug. 13 on Tuesday, based on 3 p.m. levels, according to Dow Jones Market Data.
  • The 30-year Treasury bond rate
    TMUBMUSD30Y,
    1.926%

    was at 1.922%, versus 1.906% a day ago.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.245%

    was yielding 0.242%, compared with 0.224% Tuesday.
What’s driving the market?

Yields were drifting higher ahead of the annual Jackson Hole gathering of central bankers, which is being held virtually this year due to the spread of the delta variant of COVID-19. Federal Reserve Chairman Jerome Powell is scheduled to deliver a key speech at the event but expectations for it have shifted significantly.

Investors have been playing down expectations that Powell will provide any fresh insights on the central bank’s tapering of asset purchases, until the rate-setting Federal Open Market Committee’s Sept. 21-22 meeting.

Meanwhile, fixed-income investors watched the U.S. House pass a measure, in a 220-212 vote, approving a $3.5 trillion budget proposal and locking in a late September vote on an important $1 trillion infrastructure bill already passed by the Senate.

In U.S. economic data, orders for long-lasting goods fell in July for only the second time in 15 months, but the weakness was mostly in new airplanes. Demand was strong in other parts of the economy despite broad shortages of labor and materials. Orders for durable goods slipped 0.1% last month, the government said Wednesday. Economists polled by the Wall Street Journal had forecast a 0.5% decline.

Investors may watch a sale of $61 billion in 5-year notes
TMUBMUSD05Y,
0.808%

later in the session.

Outside the U.S., the Ifo business climate index, highlighted the weakness of Germany’s economy relative to European peers, declining for the second month in a row in August, underscoring lingering concerns about the spread of the delta variant.

What analysts are saying
  • “The IFO said ‘In the hospitality and tourism sectors in particular, concerns are growing,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a note. “On the other hand, companies rated the current situation somewhat better than in the previous month,” he said. “A stagflationary situation. The euro is down slightly but bond yields are higher along with the slow creep up in US Treasury yields with the US 10 yr at 1.30%,” he added.
  • “Jackson Hole is more about cerebral theorizing and less about tactical announcements,” said Bruce Monrad, portfolio manager at Northeast Investors Trust. “It’s not an FOMC meeting, so making a tactical announcement would open up the chairman to questions about what has changed since the July meeting that prompted the change in policy.  And it would raise questions about what level of support within the FOMC accompanies this policy change, unaccompanied by a meeting and a vote including the rest of the FOMC.  Since it seems that the Fed is both divided and data-dependent, the odds of the Fed Chairman going it alone in such way seem unlikely.  So that takes us to the September FOMC meeting, complete with a press conference at which Powell can shade the messaging as he would like.”
  • “Not much will be said about tactics coming out of JH,” said Rich Sega, global chief investment strategist at Conning. “I think there are two major uncertainties that the FOMC members have to ponder, both driven by their heavy focus on employment: One is that the full effect of the expiration of supplemental UE payments and the subsequent flow of employees back to work won’t be known by this week and may not be until October after everything ends (and isn’t replaced by something new) in September. The other is the effect of policy responses to the Delta variant. Most policymakers seem to focus on cases and positivity rates, not hospitalizations and fatalities, so we could see local or statewide restrictions that might impair the jobs recovery.” “That leaves us with lots of cash looking for yield that isn’t there. But that’s not any different from what we’ve been facing for a very long time, so investors will continue to push up on already rich valuations in high grade corporates and other quality fixed income products in credit and structure. Holding cash isn’t viable for many institutional investors.”

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