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BOND REPORT : 10-year, 30-year Yield Posts Biggest One-day Jump In Six Weeks

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11/10/2017 | 11:14pm CEST

By Sunny Oh

Bondholders worry tax-cuts will widen the budget deficit and boost the amount of new issuance

Treasury prices fell on Friday, pulling yields higher, with traders taking a cue from a selloff in European government paper after data showed the eurozone's economic recovery continues apace.

That helped push yields up for the week, which was mostly influenced by headlines on the day-by-day progress of the Republican tax plan.

What are Treasury yields doing?

The 10-year Treasury note yield climbed 6.4 basis points to 2.397%, the biggest single-day gain since Sep. 27. That contributed to a weeklong gain of 5.3 basis points.

The 30-year bond yield climbed 6.8 basis points to 2.877%, also the biggest daily gain since late September. That contributed to a gain for the week of 6.8 basis points.

The 2-year note yield rose 3.4 basis points to 1.654%, a fresh 9-year high, and was up 2.4 basis points for the week. Bond prices move in the opposite direction of yields.

What's driving the market?

Strong economic data out of the eurozone underlined the currency bloc's continued recovery. That could mean the European Central Bank is more aggressive in unwinding easy-money policies, which are scheduled to be scaled back beginning in 2018. The ECB raised its growth forecast for the eurozone to 2.2% in 2017, up from its 1.7% forecast in spring.

Investors are also watching the progress of legislation to overhaul the U.S. tax code amid differences between the bills proposed by the House Republicans and their Senate counterparts .

Bondholders are worried tax-cuts will widen the budget deficit and increase the amount of new issuance hitting the market next year, weighing on prices. Moreover, any inflationary impact could push the Federal Reserve to lift rates at a faster pace, a move that would prove bearish for U.S. government paper.

What do market participants say?

"The curve flattening move that took place over the last 8 days is being unwound in massive way. Many fear of more downside in prices as Euro-Govies are on uneasy footing as [are] U.S. Treasurys at the moment," wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, referring to the selloff seen in European sovereign bonds.

The yield curve, which traces yields across Treasury maturities, has flattened in the past two weeks on concerns that the Federal Reserve would raise rates against a backdrop of tepid inflation. A flattening move describes when the gap between short-dated yields and long-dated yields narrows.

"If the global growth story is firming, that would allay not so much the deflation concerns, but the lowflation concerns," said Marvin Loh, senior fixed-income strategist at BNY Mellon.

What else is on investors' radar?

The University of Michigan's consumer-sentiment index fell to 97.8 , below the 100.7 forecast by economists polled by MarketWatch.

What other assets are on the move?

European sovereign-debt yields headed higher after a solid raft of economic data. French industrial production rose 0.6% in September, slightly higher than the 0.5% consensus estimate. But Reuters reported (http://www.reuters.com/article/eurozone-bonds/update-3-bund-future-sell-off-rattles-euro-zone-bond-markets-idUSL8N1NG2CR) large selling of German bond futures may have kick-started Friday's bearish action.

The yield for the 10-year German government bond, or bund, rose 3.5 basis points to 0.410%, while the 10-year French government bond yield rose 3 basis points to 0.779%

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