Long-dated Treasury yields stabilize near 2-month high after Powell articulates Fed’s new framework


U.S. long-term Treasury yields slipped Friday as investors processed data on the health of the economy in the aftermath of the Federal Reserve’s historic shift in its monetary policy framework a day earlier.

On Thursday, Fed Chairman Jerome Powell said the central bank would aim for an average annual inflation rate of 2%, shifting longstanding policy that are likely to have lasting impacts on financial asset prices.

How did Treasurys perform?

The 10-year Treasury note yield
TMUBMUSD10Y,
0.719%

fell 1.7 basis points to 0.727%, while the 30-year bond yield
TMUBMUSD30Y,
1.501%

pulled back 0.9 basis point to 1.508%, after the long bonds on Thursday notched their highest yields since mid-June, according to Dow Jones Market Data.

The shorter 2-year note rate
TMUBMUSD02Y,
0.156%
,
meanwhile, retreated 2.3 basis points to 0.135% on Friday. Bond prices move inversely to yields.

For the week, the 2-year note shed 1 basis point, enough for its sharpest weekly fall in about a month, the 10-year yield rose 8.8 basis points, while the 30-year rate tacked on 15.5 basis points.

What drove Treasurys?

Fixed-income markets were parsing the Fed’s decision on Thursday to alter its policy framework by aiming for a yearly average inflation rate of 2%. in contrast with the past policy of pre-emptively raising rates when inflation neared 2%. The Fed’s new policy thinking also allows the labor market to strengthen, with unemployment lower for longer periods without it raising alarms by policy makers.

Need to Know:The Fed might never hike rates again. Here are growth stocks for the long run, according to one strategist

On Friday, investors digested a batch of economic reports.

Data showed U.S. personal income rose 0.4% in July, while consumer spending was up 1.9%. Economists surveyed by MarketWatch had expected income to fall another 0.4% after a 1.1% drop in June. Spending was expected to show a 1.6% rise after a 5.6% increase in June.

Spending on durable goods was up 12.2%, while spending on services was down 9.3% for a net shortfall of 4.6% in total consumer demand, said Aneta Markowska, chief financial economist at Jefferies, adding that the variation in spending patterns explains “part of the disconnect between the stock market and the economy, since the former has much less exposure to the service sector than the latter.”

Meanwhile, the final reading of the University of Michigan’s August consumer sentiment index came in at 74.1 versus a preliminary reading of 72.8 and up from 72.5 in July.

The data come as Fed officials on Friday offered a measured outlook for the U.S. economy, which is still wrestling with the COVID-19 pandemic. “I do believe that the recovery is likely to be a slow one,” said Cleveland Fed President Loretta Mester, in an interview on CNBC.

In at later interview on the business network, Philadelphia Fed President Patrick Harker said he thought job growth and consumer spending were moving sideways in August.

“It will take a while for the employment situation to heal,” he said.

Harker and Mester are voting members on the Fed’s interest-rate committee this year.

Separately, market participants were watching news that Prime Minister Shinzo Abe would resign due to illness. Abe, whose term ends in September 2021, is expected to remain in office until a new party leader is elected and formally approved by parliament.

Read:Who will replace Shinzo Abe? 5 things investors need to know about the resignation of Japan’s prime minister

The Japanese 10-year government bond
TMBMKJP-10Y,
0.059%
,
or JGB, was trading with a yield of 0.059%. Japanese shares fell sharply, leaving the Nikkei 225 Index
NIK,
-1.40%

down 1.4%.

What did market participants say?

“Powell characterized permissible overshoots as moderate (which is to say not large) and for some time (which is to say not permanent), but he emphasized that it was important for people to ‘understand that this is not a formulaic approach […] the Committee will continue to consider all of the things that it typically considers in making monetary policy, but we’ll aspire to have inflation run above 2% after periods in which it runs for an extended period below 2%’,” wrote Morgan Stanley analysts in a research report published on Friday.

“For every dollar invested in the broad US equity market, companies are earning 4.4%. Every dollar invested in a 10-year US Treasury rate yields roughly 0.5%. Seen through that lens, it’s hard to make the case that equities aren’t attractive. Low interest rates tend to be supportive for equity multiples, as they inflate the value of future cash flow and tend to push equity market multiples higher,” wrote Invesco Global Market strategists Brian Levitt and Talley Leger in a Friday research note.



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His fund is up 60% this year after he called the March bottom — now, he sees potential for a ‘severe collapse’


Michael Gayed says he’s not trying to scare anyone, but you wouldn’t know it from his latest take.

Back in May, the fund manager warned of the possibility of two crashes: first bonds, then stocks. With his ATAC Rotation Fund
ATACX,
-0.06%

continuing to deliver the goods — it’s up almost 60% so far this year to rank among the best in its category — he’s still waving the yellow flag.

“It is a wild time in the markets,” said Gayed, who also runs the Lead-Lag Report. “Despite a crippling global pandemic, where the U.S. is failing miserably at a response with daily record after daily record cases being broken, and a U.S. economy that seems to be teetering on the edge of yet another Fed Monetary Policy response, stock markets have not seemed to blink when recovering.”

Yes, 2020 is certainly unique, considering, as he pointed out, that stocks crashed by more than 30% at one point, only to rally almost 50% from there. All that in less than eight months.

After having been bullish near the March bottom, Gayed now says that leading market indicators could very well be signalling a “severe collapse” in stocks.

The yield on the 10-year Treasury
TMUBMUSD10Y,
0.534%

, for instance, is looking at around 0.5%, while the yield on the 30-year
TMUBMUSD30Y,
1.197%

is under 1.5%., which he says is setting up for a potential reversion to the mean.

“It’s often said that bond-market investors are the smart money and tend to lead the stock market in anticipating economic activity,” Gayed explained. “The fact that yields have not risen meaningfully (quite the opposite) in the very short term is quite troubling as historically such short-term movement has tended to precede major periods of equity stress.”

Add to that, action in the utilities sector, which is seen as a recession-proof, safe-haven investment, could spell trouble for the broader market, he said, pointing to this chart showing how the defensive investments have managed to outperform the S&P 500 in the past month:

“That should raise some red flags as an equity investor, and frankly this alone gives me pause,” he said. “A similar movement occurred right before the COVID crash this year.”

Lastly, complacency could become a serious issue, with Gayed pointing to several factors, including the wild recent trading antics of Robinhood traders.

“The S&P 500 is now positive in a year that is expecting economic catastrophe. The Nasdaq is flying. And no one seems to think the market can ever go down,” he wrote in a recent note. “It sure feels like everyone forgot that investing in stocks carries risk — and the conditions are changing so rapidly right now, it looks like risk might come back into full force.”

No big crash Monday, with the Dow Jones Industrial Average
DJIA,
+0.43%

, S&P 500
SPX,
+0.76%

and Nasdaq Composite
COMP,
+1.48%

all starting off the week in the green.



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Treasury yields rise as China fuels global stock-market rally


U.S. Treasury yields rose Monday as Chinese bullish sentiment spilled over into global equity markets, weighing on appetite for safe-haven assets.

What are Treasurys doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
0.693%

rose 1.8 basis points to 0.689%, while the 2-year note rate
TMUBMUSD02Y,
0.160%

edged 0.6 basis point higher to 0.161%. The 30-year bond yield
TMUBMUSD30Y,
1.456%

rose 1.9 basis points to 1.452%. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

Chinese equities gained sharply after the country’s state media ran editorials and articles encouraging investors to buy stocks to support domestic markets. The CSI 300 index
000300,
+5.66%
,
China’s benchmark equity gauge composed of stocks listed in Shanghai and Shenzhen’s exchanges, gained 5.7%, driving it up 13.8% year-to-date.

U.S. and European stocks joined in the bullish trading, with futures for the S&P 500
SPX,
+0.45%

and Dow Jones Industrial Average
DJIA,
+0.35%

signaling gains at the start of Monday’s trade.

Still, investors are still contending with the climbing tally of new COVID-19 cases in the U.S., concentrated in a few hot-spot states including Arizona and Florida. The worry is fears of the virus could hamper consumer and business spending in the next few months, after business activity rebounded sharply in the second-quarter of this year due to aggressive efforts to reopen the economy.

In economic data, Markit will release its June services sector purchasing managers index at 9:45 a.m. Eastern Time, followed by the more closely followed report from Institute of Supply Management’s on services at 10 a.m.

What did market participants’ say?

“Despite the continued rise in cases, though, it’s risk-on as we begin the second half led by China and Asian stocks. U.S. futures are pointing to a strong open with rates modestly higher,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities.



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Treasury yields edge lower as doubts of U.S. recovery creep up as coronavirus cases spike


Treasury yields retreated from their session highs Thursday, amid haven buying driven by concerns that recent U.S. labor-market gains seen in June’s job report could be undermined if the nation fails to bring the coronavirus under control.

The bond-market will be shuttered on Friday in honor of Independence Day, based on recommendations from Securities Industry and Financial Markets Association.

What are Treasurys doing?

The two-year yield
TMUBMUSD02Y,
0.156%

edged 0.9 basis point lower to 0.155%, contributing to a 1.2 basis point drop for the week.

The 10-year note yield
TMUBMUSD10Y,
0.673%

fell 1.2 basis points to 0.670%, trimming the benchmark maturity’s weekly rise to 3.4 basis points, while the 30-year bond yield
TMUBMUSD30Y,
1.432%

was unchanged at 1.431%, leaving its weekly rise of 5.9 basis points intact. Both long-dated maturities marked their biggest weekly increase in a month.

What’s driving Treasurys?

The bond-market initially came under pressure after the U.S. Labor Department reported the U.S. economy had added 4.8 million jobs last month, above the forecast of 3.9 million from MarketWatch-polled economists. The unemployment rate fell to 11.1%, dropping for a second month in a row.

Analysts cautioned that the labor market could struggle to recover swiftly if the spreading COVID-19 pandemic slows down consumer spending as Americans stay indoors, not necessarily due to lockdown measures but out of fear of catching the disease.

The global tally for confirmed cases of the coronavirus that causes COVID-19 rose above 10.7 million on Thursday, according to data aggregated by Johns Hopkins University, and the U.S. recorded more than 50,000 new cases in a single day, for the first time since the start of the outbreak.

Opinion: Fed warns stock market of a second recession if the coronavirus pandemic isn’t brought under control

Other data also accompanied the job’s report release. The trade deficit widened in May to $54.6 billion and weekly jobless benefit claims rose by 1.43 million in the seven-day period ended June 27.

What did market participants say?

“This jobs report is very good, but backward-looking. When you look at the jobless claims numbers it gives you a more sobering perspective on what’s happening in the economy,” said Tony Rodriguez, head of fixed income strategy at Nuveen, in an interview.

“There’s continued risk that a second-wave could reverse some of these job gains in July, but that should not take away from the strength of the June data,” said Thomas Simons, senior money market economist at Jefferies.



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10-year note yield near 2-week low as U.S. sets record for new coronavirus infections


Treasury yields fell Thursday, with the 10-year rate near its lowest in about two weeks, as reports of soaring coronavirus cases in a number of states have shaken investor optimism and momentarily deflated run-up in assets to the benefit of government debt.

What are Treasurys doing?

The 10-year Treasury note rate
TMUBMUSD10Y,
0.666%

dropped 2 basis points to 0.664%, while the 2-year note yield
TMUBMUSD02Y,
0.183%

edged 0.6 basis point down to 0.182%. The 30-year bond yield
TMUBMUSD30Y,
1.408%

slipped 3.5 basis points to 1.411%.

What’s driving Treasurys?

The focus remains on the growing tally of coronavirus infections in more states. That has pushed the U.S. to a record in daily new cases. On Wednesday, the U.S. reported 38,680 new cases, edging out the previous high of 36,739 cases on April 24, the Associated Press reported.

Meanwhile, states that have made progress in controlling the coronavirus, but were also the worst-hit in the early days of the pandemic, are moving to curtail the risk from rising infections in other parts of the country. New York, New Jersey and Connecticut imposed a two week quarantine on visitors coming from states and areas with high infection rates.

Renewed concerns around the pandemic could stall efforts to reopen businesses and ease restrictions on social activities, slowing the pace of the economic rebound.

Investors will face a raft of important U.S. economic data in the morning. May durable goods and last month trade deficit data will come out at 8:30 a.m. Eastern Time, along with the latest jobless claims numbers. MarketWatch-polled economists expect Americans to file 1.38 million new applications for unemployment benefits, down from 1.51 million.

The Federal Reserve will also release the results of the stress tests of U.S. banks, which are designed to check if the banks can survive a severe economic downturn without curbing lending.

Read: Banks to wait until market close on June 29 to talk about impact of Fed stress tests on their cap

What did market participants’ say?

“As the Fed pointed out recently, and it’s true, the health side of the equation will matter just as much as monetary policy in the coming months. And with markets priced for near perfection off the March 23rd bottom, we are quickly reminded of the challenges that still persist,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities.



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