Treasuries Post Weekly Gains, Driving 30-Year Yields Below 3%

  • 10-year yield falls to lowest closing level since November
  • Yields continue to trail bigger shifts in euro-zone debt

Is the Bond Market Calling the Fed's Rate Bluff?

Treasuries surged to end the week, sending the 30-year yield below 3 percent and the 10-year yield toward its lowest closing level since November, amid gains for U.K. and euro-zone bond markets and fading expectations for U.S. fiscal stimulus.

Yields were lower by 4-6 basis points at 3:23 p.m. in New York, with the 10-year falling 6 basis points to 2.31 percent. Its lowest closing level this year was 2.325 percent on Jan. 17. Friday’s move erased what remained of the Feb. 9 increase spurred by President Trump’s pledge to unveil a tax plan within weeks. That hasn’t occurred, and Bank of America Corp. economists said Friday they expect “virtually no fiscal stimulus this year.”

  • Trump is slated to address Congress Feb. 28, and if he doesn’t deliver a legislative timeline for tax reform, “markets will be disappointed and rates can decline some more,” TD strategists led by Priya Misra said in note
  • 10Y yield is lower on week by nearly 10bp, trailing steeper declines for U.K. and German 10Y yields; U.K. and German bonds have benefited from flight from French debt as anti-euro presidential candidate Marine Le Pen’s poll standings have improved
  • U.K. 10-year yield fell to the lowest since before U.S. Election Day and the German 10-year yield declined to its lowest this year
    • U.S.-U.K. 10-year spread at about 124bp matches generational high reached in December; U.S.-German 10-year spread narrowed for the first day in six
  • UST 30Y yield declined 6bp to 2.95%, its first close below 3% since Feb. 8
  • Short positioning helped drive gains for USTs over past week, participants said; latest CFTC futures positioning data showed near-record speculator short base across 10Y futures of around 300k contracts
  • USTs have support from approach of month-end index duration extensions (0.11yr estimated for Bloomberg Barclays U.S. Treasury), offset by view in some quarters that expectations for a March Fed rate hike are too low
  • Barclays strategists recommended shorting April fed funds futures on view that market-implied odds of a move on March 15 will shift toward 50% from 20%
  • Yellen’s March 3 speech on economic outlook represents Fed’s final conventional opportunity to influence market-implied odds of a March hike as self-imposed pre-meeting media blackout begins the next day

— With assistance by Edward Bolingbroke

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