U.S. Treasurys picked up where they had left off, pushing yields higher Wednesday as investors continued to rotate out of government paper and other assets perceived as less risky, while traders looked ahead to consumer price data.
Some analysts are betting that a recent bipartisan effort to lift the debt ceiling suggests that President Donald Trump has grown more willing to reach across the aisle to get pro-business policies, including tax reform, enacted. Late Tuesday, Trump had dinner with three Democratic senators who were reportedly open to the idea of tax reform.
But other market participants suggested they weren’t holding their breath, with Trump having yet to achieve any of his major priorities since his inauguration. Treasury prices have rallied since the beginning of the year on subdued concerns that his pro-growth agenda would spur inflation.
“The jury is still out on getting something done,” said Marvin Loh, senior fixed-income strategist for BNY Mellon.
The yield on the short-term two-year Treasury note TMUBMUSD02Y, +0.31% added 2 basis points to 1.355%, its highest level since Aug. 8. The 10-year Treasury note yield TMUBMUSD10Y, +0.94% was slightly higher at 2.194%, compared with 2.171% late Tuesday in New York, but still markedly higher relative to its levels last week. Meanwhile, the 30-year Treasury yield TMUBMUSD30Y, +0.52% rose 2 basis points to 2.749%, versus 2.774%.
Bond prices and yields move in the opposite direction.
Long-dated Treasurys notched their third straight session of losses as bond investors unwound haven plays seen last week. The 10-year Treasury yield had ducked under 2.10% on concerns about tensions between North Korea and the U.S. and the impact of Hurricanes Irma and Harvey on the overall economy. The recent yield rise suggests, however, that traders are lowering the odds of any lasting effect on the economy and markets.
The waning of those fears has rejuvenated appetite for assets perceived as risky and pushed the Dow Jones Industrial Average DJIA, +0.18% the S&P 500 index SPX, +0.08% and the Nasdaq Composite Index COMP, +0.09% to their first day of simultaneous records since late July on Tuesday. All three indexes closed at record highs for a second day in a row Wednesday.
“With the better risk-on environment, we’ve completely reversed the yield compression from last week,” said Loh.
Assets perceived as haven investments other than government paper also sustained losses. The yen USDJPY, +0.01% traded against the dollar at ¥110.56 from ¥110.17 on Tuesday in New York, while gold prices GCZ7, -0.13% shed $4.60, or around 0.35%, to $1,323.40 per ounce.
The Labor Department’s producer-price index for August showed a 0.2% increase, below the average estimate for a 0.3% rise, in a survey of economists by MarketWatch. The rebound follows a drop of 0.1% for July, which marked the first decline in almost a year.
Over the past year, producer prices have decelerated to a 1.9% annual rate, and have steadily dipped from a high of 2.5% in April. The July annual rate has been the lowest since January.
Muted inflation can encourage buying in government paper because rising inflation erodes a bond’s fixed value, particularly in longer maturities. But analysts say that new changes to how producer prices are computed has weakened their correlation with consumer price inflation, arguably the more important figure. August CPI data is due Thursday.
“Rising input prices are on our radar as a medium-term concern, but less as an inflation driver and more as a risk to corporate profitability,” said Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets, in a note to a clients. Higher producer prices could crimp earnings, leading firms to cut staff to protect profit margins. This could, in turn, reflect an economy that is at the tail end of its expansion.
Soggy inflation has been the biggest bugaboo for global central bankers and bond investors alike. In theory, inflation and rising prices should coincide with a U.S. job market that has looked mostly healthy. However, the annual rate of inflation has fallen below the Federal Reserve’s 2% target, providing some headwinds to the central bank’s plan to normalize monetary policy by lifting rates and unwinding its $4.5 trillion asset portfolio.
Presently, the market is pricing in a roughly 47% chance of one more rate increase by the Fed before the end of 2017, having fallen as low as 23% last week, according to CME Group Data.
For all the importance placed on this week’s inflation data, traders could be hesitant to make big moves ahead of the central bank’s policy-setting meeting next Tuesday and Wednesday, where a change in policy and rates is not anticipated but where further clues about the game plan for the Fed will be closely watched.
The Treasury Department added another weak auction of 30-year bonds, to bookend a string of lackluster debt sales this week, perhaps reflecting a lowered outlook for risks that had driven bond prices higher and yields lower over the past several sessions.
In exchange-traded products, the popular iShares 20+ Year Treasury Bond ETF TLT, -0.39% was down slightly at 0.4%. The fund, also known as TLT for its ticker symbol, has risen 6% so far this year.