By Vivien Lou Chen and William Watts
U.S. Treasury yields slipped from their New York session highs on Friday, with the 10-year retreating from the 1.30% level and ending lower on the week after a report showed U.S. business activity cooling in July amid supply constraints.
What are yields doing?
The yield on the 10-year Treasury note (XTUP:BX:TMUBMUSD10Y) rose 2.2 basis points to trade at 1.286% versus a level of 1.264% Thursday afternoon.
The 2-year note yield (XTUP:BX:TMUBMUSD02Y) was unchanged at 0.2% since Thursday.
The yield on the 30-year Treasury bond (XTUP:BX:TMUBMUSD30Y) rose 2.5 basis points to 1.925%, compared with 1.90%.
What’s driving the market?
Long-end yields slipped from their New York session highs on Friday, ending marginally lower for the week, after IHS Markit said its Flash U.S. Composite Output Index fell to a four-month low in July as firms continued to report widespread capacity constraints. Earlier in the week, the 10-year rate had dipped to a five-month low on a flight-to-safety in bonds amid investor concern about the spreading Covid-19’s delta variant’ impact on economic growth.
In U.S. stocks, the Dow Jones Industrial Average DJIA was on track to surpass another milestone Friday as it tried to stay above the 35,000 level. The Dow was up 246.50 points, or 0.7%, at 35,072.90 in late afternoon trade, and the S&P 500 SPX was higher by 1%.
Analysts said next week’s meeting of Federal Reserve policy makers will take center stage, with investors eager for further guidance on the timing of an eventual tapering of the central bank’s asset purchases and the subsequent liftoff of interest rates. Read: Fed to tiptoe next week towards tapering
What are analysts saying?
Friday has been “a typical low volatility, lighter liquidity summer day,” said Ian Burdette, managing director and head of rates trading at Academy Securities.
“Clearly, the curve has significantly bull flattened over the last month and, as we go into next week’s FOMC meeting, the expectation is for a dovish communique from the Fed,” Burdette said via phone. “As we get closer to late August, there’s a rising possibility of some renewed volatility, with an increasing likelihood that the Fed’s Jackson Hole confab produces more substantive information on tapering QE.”
Meanwhile, “markets are grappling with the transitory concept of inflation,” he says. “Inflation is a bigger threat than appreciated, and there are components of the inflation dynamic that are likely not going to turn out to be transitory. Ultimately, the Fed will have to address that, whether it’s a quicker-than-consensus taper of quantitative easing or a faster shift in the policy rate: One or the other — or a combination of the two.” The fall in yields over the past couple of weeks reflects an unwinding of short positions or rebalancing, “whether from the pension fund community, the impressive foreign bid, or a short covering squeeze,” said Rob Daly, director of fixed income at Glenmede Investment Management. “But given what I see as a strong U.S. growth backdrop and moderately higher inflation, yields shouldn’t be here — they should be higher. We’ve seen a lot of positions cleared out, which gives us a cleaner backdrop for a move higher in yields.”