U.S. Treasury yields edged higher on Tuesday as fears over the U.S.’s protectionist policies ebbed, with global stock markets rising, and as bond investors positioned for the next phase of a glut of fresh debt offerings.
The bond market will be closed at the end of the week in observance of Good Friday.
How are Treasurys performing?
The yield on the 10-year Treasury note TMUBMUSD10Y, -0.77% edged up 0.7 basis point to 2.850%. The two-year note yield TMUBMUSD02Y, -0.70% the most sensitive to shifting expectations for Federal Reserve policy, advanced 2.7 basis points to 2.306%. Meanwhile, the 30-year Treasury bond yield TMUBMUSD30Y, -0.42% added 1.5 basis points at 3.086%.
Bond prices fall as yields rise.
What’s driving the market?
The U.S. government is slated to auction some $79 billion of notes and about $90 billion of bills in the coming days after some $126 billion of debt was sold on Monday. The increased supply is a part of the government’s attempt to fund spending increases, with the coming debt expected to weigh on appetite for bonds, driving prices lower and yields higher.
On Monday, reports hit that China and the U.S. were engaged in quiet talks to quell growing trade tensions that some economists believe threaten to upend global economic growth. This development helped to reignite interest in assets perceived as risky any away from havens like bonds.
Although fears of political uncertainty around trade haven’t entirely dissipated, investors are shifting some of their focus to the expectation of rising rates, with markets penciling in at least two more interest-rate increases by the Federal Reserve for 2018. Climbing rates can encourage selling in bonds as investors await new issuance with richer coupons.
Moreover, the additional fiscal boost to the U.S. economy coming from the tax cuts signed into law late last year by President Donald Trump and a two-year budget deal, which are expected to deepen the budget deficit and the current-account deficit, have drawn the attention of bond investors, who refer to the dynamic as “twin deficits.”
Read: Here’s what ‘twin deficits’ means for the dollar and the Fed
What are strategists saying?
“The prospect of wider fiscal deficits will translate into higher issuance of Treasurys, where the latter has exceeded the former,” wrote Institute of International Finance economists, led by Robin Brooks, in a Monday research note. IIF’s analysts said an overheating economy “including faster Fed hikes, could weigh on this flow via dollar strength, exacerbating what is already—given Fed roll-off—a challenging funding picture.” That refers to the central bank’s wind down of its $4.5 trillion crisis-era balance sheet and the persistent weakness in the ICE U.S. Dollar Index DXY, +0.13% a gauge of the buck against a half-dozen currencies, which is down 2.9%, so far this year.
What data and speakers are on deck?
Case-Shiller’s January report on U.S. home prices is due at 9 a.m. Eastern Time, and a March figure for a consumer-confidence index is slated to hit at 10 a.m. Economists polled by MarketWatch expect a reading of 131.0 for the confidence gauge, compared with 130.8 the prior month.
In terms of Federal Reserve speakers, Atlanta Fed President Raphael Bostic is scheduled to make remarks at 11 a.m. Eastern.
What other assets are in focus
As a sign of growing appetite for risk, which may add to the recent uptick for bond yields, the Dow Jones Industrial Average and the S&P 500 index were set to show solid gains for a second straight session on the heels of the steepest weekly decline for the main U.S. benchmarks in more than two years.
The 10-year German government bond yield TMBMKDE-10Y, -0.99% was at 0.526%, compared with 0.520% on Monday, but has steadily fallen from a three-year high around 0.800% notched intraday in early February.