Treasuries Whipsaw on Geopolitical Risks, Hawkish Fed Officials

  • Benchmark 10-year yields climb for sixth-straight week
  • Fed officials project steeper path of interest rates in 2017

Treasuries swung between gains and losses, rallying on a report that China’s Navy seized a drone deployed by a U.S. oceanographic vessel in the South China Sea, only to pare gains as Federal Reserve officials raised their outlook for interest-rate increases.

The U.S. 10-year yield was little changed at 2.6 percent at 4:40 p.m. in New York, after falling as much as 4.6 basis points. It remains higher for a sixth-straight week, the longest stretch since December 2013.

  • “There’s been some discontent between China-U.S. relations ever since Trump was elected -- things have soured quite significantly,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings in New York. That’s an issue because “they’ve been a big buyer of Treasuries for the last 20 years,” he said.
  • The Pentagon is demanding China immediately return the drone, which was being recovered by a U.S. Navy ship during routine operations 50 nautical miles northwest of Subic Bay in the Philippines
  • Jeffrey Lacker warned that the U.S. central bank may have to raise rates more than three times next year; he’s one of the Fed’s most hawkish policy makers
  • St. Louis Fed President and FOMC voting member James Bullard also says he now sees a need for a rate increase in 2017: WSJ
  • Treasury yield curve from five to 30 years steepened, extending its rebound from levels near year-to-date lows; spread remains lower on the week by about 15 basis points
  • The yield spread between 10-year U.S. notes and similar-maturity Treasury Inflation Protected Securities, or TIPS, falls 11 basis points this week to 1.89 percentage points, the steepest decline in a year
  • Market reaction was muted to bigger-than-forecast drop in Nov. housing starts; starts slumped 18.7 percent to a 1.09 million annualized rate in November after a 27.4 percent increase to 1.34 million a month earlier, Commerce Department data showed
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