Treasurys on Thursday afternoon drew bids, pushing debt prices up and yields down, after President Donald Trump said he wasn’t pleased that the Federal Reserve was raising rates, eroding the effects of fiscal stimulus by his administration.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, +0.35% fell 2.9 basis points to 2.845%, while the 30-year bond yield TMUBMUSD30Y, +0.00% slipped 2.3 basis points to 2.965%. The 2-year note yield TMUBMUSD02Y, +0.65% declined 1.9 basis points to 2.593%, backing away from its highest levels since 2008.
Meanwhile, the yield differential between the 2-year and the 10-year bond was at 25.2 basis points, or 0.252 percentage point, hovering around its tightest levels in more than a decade. A tightening spread between short-dated and longer-dated bonds is often viewed as a sign of downbeat outlook of the economy by investors.
What’s driving Treasurys?
Treasurys rallied as Trump said in an interview with CNBC’s Joe Kernen that he wasn’t “thrilled” that the Fed was tightening monetary policy. Rising rates are bearish for bonds as they mean existing bonds are sold at lower prices in expectation of richer-yielding paper in the future.
“I don’t like all of this work that we’re putting into the economy and then I see rates going up,” Trump told CNBC during an excerpt from an interview on Thursday set to air early Friday.
Recent testimony by Fed Chairman Jerome Powell and reports of labor shortages in the Beige Book suggest the Fed remains on track to raise rates once or twice more in 2018, after raising rates twice already this year.
On Thursday, investors watched some escalation of trade tensions between the U.S. and other partners after Trump said a failure to negotiate “something fair” with European and North American allies could lead to “tremendous retribution,” referring to possible duties of between 20% and 25% on automobile imports.
Although bonds have been bought during trade tensions, pushing yields lower, tariff spats recently have been mostly interpreted by investors as threats that aren’t likely to materialize, even though the U.S. and China implemented $34 billion in reciprocal import duties weeks ago.
Analysts say long-dated Treasury yields have been kept in check by buying from pension funds, which must match long-dated assets like bonds against their payouts to pensioners. Market participants have attributed yields holding lower for longer-dated bonds to significant buying from large pension funds.
What did market participants say?
“I am not overly concerned with independence of monetary policy at the moment. This versus how Erdogan is approaching monetary policy in Turkey is light years away,” said Marvin Loh, senior fixed-income strategist at BNY Mellon, referring to Turkish President Recep Tayyip Erdogan who has leaned on Turkey’s central bank to lower rates in the face of growing inflation pressures.
“I do think you have to say to yourself obviously Trump’s on the business side of the economy, he certainly understands how painful higher interest rates can be, and he is probably somewhat concerned about the overall economy based on the Fed hiking rates than they possibly should. What was said by Powell this week and what was confirmed by the Beige Book yesterday is a strong indication that the Federal Reserve will continue to hike rates in September and again in December. They’re willing to raise rates at least two times in 2019,” said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.
What else is on investors’ radar?
Weekly jobless claims fell by 8,000 to 207,000 for the seven days ending in July 14, the lowest level since the end of 1969. While the Philadelphia Fed index for July came in at 25.7, well above the consensus estimate of 21.5 from economists polled by MarketWatch.