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BOND REPORT : Treasury Yields Edge Lower Ahead Of Fed Minutes

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01/03/2018 | 06:14pm CEST

By Mark DeCambre and William Watts, MarketWatch

Treasury prices ticked up, pushing yields slightly lower, on Wednesday as Wall Street awaited minutes from the Federal Reserve policy-setting gathering last month and as investors assessed Middle East unrest.

What are Treasurys doing?

The 10-year Treasury yield fell 1.7 basis points to 2.446%. The yield is hovering at the same level it was a year ago.

The 30-year bond yield slipped 1.8 basis points to 2.795%.

The 2-year note yield edged up 0.4 basis point to 1.927%.

Bond prices move inversely to yields.

What's driving the market?

An account of the Federal Open Market Committee's Dec. 12-13 meeting will be released at 2 p.m. Eastern and likely will be pored over for further clues about the pace of the Fed interest-rate increases, against the backdrop of inflation hovering below the policy makers's 2% annual target and recent tax cuts that are expected to drive the economy higher.

According to CME Group data, market participants are expecting the next rate increase, after the Fed's recent quarter-percentage point increase to a range between 1.25% and 1.5%, to occur in March.

What has been viewed as muted moves in Treasury yields come as the dollar, as gauged by the ICE U.S. Dollar Index , has been near its lows for September at 92.07, despite tax-cut legislation and other fiscal stimulus measures which were expected to boost the buck.

Traders also focused on geopolitics, as thousands of people took to the streets of Iran on Wednesday, voicing support for Supreme Leader Ayatollah Ali Khamenei, following what has been the largest wave of antigovernment unrest in almost a decade (https://www.wsj.com/articles/economics-dissatisfaction-with-current-regime-fuel-iran-protests-1514679332).

Meanwhile, North Korea reopened communications with its neighbor the South, highlighting signs of relaxed tensions on the Korean Peninsula (https://www.wsj.com/articles/north-korea-revives-hotline-for-talks-with-south-1514957698).

What does the data show?

The December Institute for Supply Management manufacturing index came in at 59.7% , up from 58.2% in November and marking the strongest year for the activity gauge since 2004, according to FactSet. A figure above 50% indicates activity is expanding.

The Commerce Department said construction spending rose 0.8% in November, surpassing expectations for a 0.5% rise.

What are strategists saying?

"Today's FOMC minutes will provide some assessment on the U.S. inflation outlook. If the central bank reveals concerns over upside inflation expectations due to fiscal policies and an improved labor market, investors are likely to cover some of the dollars short positions. This should be reflected in interest rate expectations for March which currently indicate a probability of 56.3% rate hike in March," said Hussein Sayed, chief market strategist at FXTM.

The December ISM reading "is the thin air of the high peaks," wrote Wells Fargo economists John Silvia and Tim Quinlan, in a note. "It is quite uncommon for the ISM index to remain so firmly in expansion territory for such a long period of time. The only other time in the past 40 years that the ISM came in at 58 or higher for this many consecutive months was a streak that lasted from November 2003 to August 2004."

What other assets are in focus?

The German 10-year bond yield, known as the bund , and serving as a proxy for the health of the eurozone economy, was at 0.439%, versus 0.433% on Tuesday.

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