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BOND REPORT : 2-year Yield Hits Fresh 9-year High Wager On Tax Bill

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11/08/2017 | 10:08pm CET

By Sunny Oh

2-year yield climbs to 1.645%, the highest since Oct. 2008

Treasury yields rose on Wednesday as investors assessed the likelihood of tax-cut legislation working its way through Congress soon. Tax policy has been a major driver of recent bond trading because of its implication for the U.S. deficit and future fixed-income investment.

What are yields doing?

The 10-year Treasury note yield was up 1.6 basis point to 2.325%. The 2-year note yield edged 1.6 basis point higher to 1.645%, the highest since Oct. 2008. The 30-year bond yield, meanwhile, rose 1.3 basis point to 2.786%, snapping eight straight days of declines.

What's driving Treasurys?

Resistance to the tax proposal has been strong. Limitations on deductions for mortgage interest and state and local taxes are seen as among the most controversial elements that could hamper its passage.

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 raise rates at a faster pace, a move that would prove bearish for U.S. government paper.

Meanwhile, the Congressional Budget Office on Wednesday said the tax bill written by House Republicans would boost the deficit by about $300 billion more than lawmakers estimated, outside of the $1.5 trillion size the recently passed budget would require to meet Senate rules.

What did market participants say?

"The "Tax Cuts and Jobs Act"--TCJA--released by the leadership of the House Ways and Means Committee has been under attack, which is not surprising given that it includes numerous measures raising as well as lowering tax burdens," said Jim O' Sullivan, chief U.S. economist for High Frequency Economics. "Congress will eventually pass a bill that lowers tax rates and includes at least modest fiscal stimulus in 2018. We expect some failed attempts along the way, however."

"Tax reforms (or at least a tax cut) appear to be 'on track', stocks remain near record high levels, the Fed is locked-in for a December rate hike, real economic growth is poised to deliver steady gains, and the Treasury Department will be increasing coupon auction sizes in 2018 -- all of which suggest that yields should be biased higher," wrote Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets.

What else is on investors' radar?

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