2-7-18 2:28 PM EST | Email Article

By Mark DeCambre, MarketWatch , Sunny Oh

Treasury yields jumped Wednesday as Senate leaders agreed to a two-year budget deal that would increase defense spending and raise the government borrowing cap.

U.S. equities bounced around following a pause in a downdraft for stocks, marked by the reemergence of once-dormant volatility, despite signs that the domestic and global economies remain healthy.

Market participants have largely pegged the resurgence of choppy trading to fresh concerns about the pace of rate increases by the Federal Reserve in the face of growing signs of inflation.

How are Treasurys performing?

The yield on 10-year Treasury notes rose 7.2 basis points to 2.838%, after having fallen to a nadir at 2.648% earlier in the week. The benchmark yield had hit a four-year high of 2.883% on Monday, underlining the vacillations among investors between worries about intensifying stock-market instability and a pickup in inflation.

The 2-year note yield was up 5.4 basis points to 2.138%, while the 30-year rate climbed 7.3 basis points to 3.116%.

Meanwhile in Europe, German 10-year bond yields, known as bunds , added 4.8 basis points to 0.743% according to FactSet data.

Bond yields and prices move in inverse directions.

What is driving markets?

Treasury yields extended their climb after Senate Majority Leader Mitch McConnell, R-Ky., and Minority Leader Chuck Schumer, D-N.Y., agreed to a two-year budget deal that would lift the debt ceiling and stave off a government shutdown. But a brief partial shutdown last month didn't weigh on the market that much (http://www.marketwatch.com/story/dow-futures-retreat-as-government-shutdown-stretches-into-3rd-day-2018-01-22).

See: Congressional leaders say they've struck two-year budget deal (http://www.marketwatch.com/story/congressional-leaders-say-theyve-struck-two-year-budget-deal-2018-02-07)

Some said yields rose because increased spending and deficits from the proposed bill would open the floodgates for increased Treasury issuance.

The predominant themes for Treasury investors, leading bonds to sell off and drive yields higher, has been expectations for increased deluge of supply, inflation concerns and further monetary tightening by the Fed. Rising inflation or prices can erode a bond's fixed value, sparking selling in the asset.

What are strategists saying?

"We're moving through a type of sound barrier. On the way down, there was some instability as investors had to reposition their portfolios in the zero interest rate world. What's occurring now through the leadership of the Fed is higher rates will meaningfully disrupt asset allocations," said Arnim Holzer, global macro strategist for EAB Investment Group.

"It's possible stocks get into a more normal volatile trading range, and you'll see the selling that people wanted to accomplish [in bonds] come back, and we haven't seen that exactly happen. It's been bursts of selling so far," said Jim Vogel, interest-rate strategist for FTN Financial.

Joseph Brusuelas, chief economist for RSM, said in a tweet that concerns trillion dollar budget deficits will become the norm may have put pressure on bonds.

(https://twitter.com/joebrusuelas/status/961302639475642368)

What else is on investors; radar?

Chicago Fed President Charles Evans said inflation pressures were building up (http://www.marketwatch.com/story/feds-evans-sees-hint-of-building-inflation-pressures-in-latest-data-2018-02-07) but that higher rates should be put off until midyear. Dallas Fed President Robert Kaplan speaking in Frankfurt described the recent turbulence in the stock market as "healthy," and suggested that it wouldn't have an impact on the broader economy:

"I think its basically a market event and these things can be healthy," he said, according to a CNBC report (https://www.cnbc.com/2018/02/07/feds-kaplan-says-the-market-correction-is-healthy-and-sees-no-impact-on-the-economy.html).

What are other assets doing?

Stocks continued to be tempest tossed early Wednesday by higher yields in government paper. The Dow Jones Industrial Average was up 0.6%, the S&P 500 was up 0.3%, the Nasdaq Composite Index was down 0.1%.

 

(END) Dow Jones Newswires

February 07, 2018 14:28 ET (19:28 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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