MW: Treasury yields rise as investors turn to riskier assets
Treasury prices fell Tuesday, pushing yields to their highest level in nearly a week, as a modest uptick in crude-oil prices helped push investors toward riskier assets.
The yield on the 10-year Treasury note TMUBMUSD10Y, -0.17% the Treasury market’s benchmark, gained 1.2 basis point to 2.170%, rebounding from the three-month lows it reached last week, according to Tradeweb.
The yield on the two-year note TMUBMUSD02Y, +3.43% rose 2.4 basis points to 0.952% while the yield on the 30-year bond TMUBMUSD30Y, -0.45% was unchanged at 2.957%.
Reflecting the shift toward riskier assets, U.S. stock-market benchmarks jumped.
Price action in the Treasury market has recently been driven by the balance between strong economic data in the U.S. and a backdrop of global weakness, particularly in China, said Robert Tipp, Prudential Fixed Income’s chief investment strategist.
“There is the U.S. macro story and then there’s the global macro story,” Tipp said. That, he added, explains why Treasury yields didn’t jump on Friday on the heels of a much-stronger-than-expected jobs report.
In fact Treasury yields declined last week as demand for safe assets intensified during the rout in stock and commodity markets that was sparked by turmoil in China’s markets and a further weakening of its currency, the yuan.
The perceived weakness in global growth has also led interest-rate strategists to assume a very gradual path of future rate hikes by the Federal Reserve in 2016.
On Tuesday, the spread between the market-implied fed-funds rate in January 2017 and today compressed to its lowest level since the 2013 taper tantrum, according to data from Janney Montgomery Scott.
This means that “the markets are pricing in the easiest path of policy over a twelve-month horizon at any point in the last thirty months—ironic considering the rate-hike cycle has finally started,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, in a note.
Dallas Fed President Robert Kaplan noted Monday during his first public speech of 2016 that four rate hikes this year are not “baked into the cake.” Rather, Fed officials need to “pay attention to underlying economic conditions and we certainly have to watch what’s going on with financial conditions,” he said. Kaplan isn’t a Fed voting member this year.
In Europe, government bond yields also rose as equity markets rebounded and investors sold debt in favor of riskier assets. The yield on the 10-year German bund TMBMKDE-10Y, +3.75% rose 2.2 basis points to 0.560%.
