MW: Treasury yields edge higher ahead of Fed meeting
NEW YORK (MarketWatch) — Treasury yields inched higher on Monday as the market braced for a statement from Federal Reserve policy makers, expected Wednesday.
Investors hope the statement will shed light on the date and pace of a potential future interest-rate increase.
A risk-on sentiment that led equities to trade in record-high territory, pushed bond prices down from last week’s higher levels caused by a series of weak reports, including durable goods, jobless claims, new-home sales and manufacturing data.
This week’s Fed meeting doesn’t include a news conference or updated projections, and therefore the FOMC statement, along with a preliminary reading on first-quarter gross domestic product growth results, will be the focus for most investors, said Anthony Valeri, investment strategist for LPL Financial.
As recent data have come in “notably below what the Fed has forecast,” rate hike expectations in the market have been falling constantly, Valeri said.
Since Fed officials are in a “blackout” period with no public comments ahead of the meeting, economic reports had an even stronger impact on the Treasury market during the past few trading days.
“Last week the market priced in the bad news and [on Monday] investors seem to be stepping back and reassessing,” he added.
“Despite the intra-week fluctuations, market expectations for future interest rate volatility are falling,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said in a note.
The CBOT’s Ten-Year Treasury Implied Volatility Index, which relies on short term options trading, fell close to its year-to-date lows.
“Trading sentiment remains heavily skewed to the short side… and real money managers tend to believe that much of the curve is close to fair value,” LeBas added.
The yield on the 10-year Treasury note TMUBMUSD10Y, +1.15% rose 2.8 basis points to 1.945%, according to data from Tradeweb. The yield on the two-year note TMUBMUSD02Y, +4.86% increased 1.7 basis points to 0.529% and the 30-year bond TMUBMUSD30Y, +0.56% yield gained 2.3 basis points to 2.642% on Friday. Treasury prices move in the opposite direction of yields.
Meanwhile, the U.S. Treasury market continues to be driven by the relative-yield trade between low-yielding eurozone bond markets and U.S. Treasurys, as the European Central Bank continues its aggressive trillion-euro bond-buying program.
Negative-yielding eurozone government debt is currently at 2.8 trillion euros ($3.02 trillion), according to a Bank of America Merrill Lynch report dated April 22.
On Monday, strengthening bond prices in the eurozone’s periphery, especially Spain, Italy and Greece, took appetite away from the German Bund and U.S. Treasurys, Valeri said.
While the 10-year Greek bond yield shaved off 81.5 basis points to 11.870%, on news that Greece reshuffled its bailout-negotiating team to make it more creditor-friendly, the benchmark 10-year Bund TMBMKDE-10Y, +2.93% yield gained one basis point to 0.166%,
