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BOND REPORT : Treasury Yields Turn Lower After Draghi's Dovish Remarks And Trump Tariffs

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03/08/2018 | 10:18pm CEST

By Sunny Oh

Treasury yields mostly fell Thursday after European Central Bank President Mario Draghi played down the significance of the central bank's decision to remove language from its policy statement saying it would increase its asset purchases if the economic outlook weakened.

President Donald Trump also signed off on tariffs on steel and aluminum imports.

What are Treasurys doing?

The 10-year Treasury note yield fell 1.6 basis points to 2.866%, according to Tradeweb data.

The two-year note yield was flat at 2.254%, while the 30-year bond rate shed 1.8 basis points to 3.133%.

Bond prices move in the opposite direction of yields.

What's driving Treasurys?

The ECB kept rates unchanged and said it would extend its asset purchases beyond September if necessary. The central bank left interest rates unchanged, in line with market expectations, and also kept its 2018 and 2020 inflation forecasts unchanged. But analysts fixated on the removal of a line saying that the central bank would increase the pace of its bond-buying if the outlook deteriorated.

Ordinarily, such a shift would portend a hawkish turn from the central bank as investors raise expectations for the ECB to halt its bond-buying operations. But Draghi said the decision was a "backward-looking measure" and would not make a material difference to upcoming policy. Nonetheless, analysts saw the move as a baby step toward bringing quantitative easing to an end.

Live blog recap: ECB moves step closer to ending QE

Trading in U.S. government bonds is influenced by the ECB's actions as investors have blamed ultra-accommodative monetary policy in Europe and Japan for drawing foreign investors to U.S. shores, pushing down long-term bond yields.

Analysts said that tariff announcements on steel and aluminum, along with February's jobs report, could keep traders from placing large trades until they received clarity from both events. Economists surveyed by MarketWatch expect average hourly earnings to rise by 0.2%, and for the economy to add 220,000 jobs.

Fears of a trade war and retaliatory tariffs have led some investors to take shelter in government bonds, even as others highlighted concerns that increased import prices would stoke inflationary pressures.

Also check out: ECB's Mario Draghi: 'If you put tariffs against your allies, one wonders who the enemies are'

What did market participants say?

"The ECB certainly does not want to get ahead of itself, or for the markets to overreact to its policy tweak, and the dovish tone of Draghi's presentation today reflected these objectives," said Marchel Alexandrovich, senior European economist at Jefferies.

"Fed officials have largely conceded that the labor market is vigorous and shifted their focus to whether that strength will lead to a significant pickup in wages and prices. Thus, as has been the norm recently, the wage figures will take center stage tomorrow," said Stephen Stanley, chief economist for Amherst Pierpoint Securities.

What else is on investors' radar?

Jobless claims for the week ended March 3 climbed 21,000 to 231,000 claims , above the MarketWatch economists' forecast of 220,000 claims.

What other assets are on the move?

The German 10-year government bond yield was also volatile, falling 7 basis points from its intraday high to 0.630%. German bonds serve as proxy for the eurozone's economic health and its viability.

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