2-7-18 8:31 AM EST | Email Article

By Mark DeCambre, MarketWatch

Treasury yields edged higher early Wednesday as U.S. equity futures 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 choppiness to fresh concerns about the pace of rate increases by the Federal Reserve in the face of growing signs of inflation.

Against that backdrop, government-bond traders will be watching a number of Fed speakers in early trade to offer some semblance of calm investors.

How are Treasurys performing?

The yield on 10-year Treasury notes rose a slight 1.3 basis points to 2.779%, after having fallen to a nadir at 2.648% earlier in the week. The benchmark yield also extended a rise to a four-year high to 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 mostly flat at 2.091%, while the 30-year rate was little changed at 3.045%.

Meanwhile in Europe, German 10-year bond yields, known as bunds , added 2.4 basis points to 0.715% according to FactSet data.

Bond yields and prices move in inverse directions.

What is driving markets?

The Dow Jones Industrial Average traversed more than 1,000 points intraday on Tuesday, before settling 567 points higher, for its biggest percentage gain in two years (http://www.marketwatch.com/story/dow-futures-swing-wildly-in-battle-to-recover-from-historic-selloff-2018-02-06), underscoring an end of a prolonged period of calm in the market, which has driven some investors to find shelter in government paper.

Read: MarketWatch's snapshot of the market (http://www.marketwatch.com/story/dow-poised-to-slide-give-up-chunk-of-rally-2018-02-07)

However, the predominant themes for Treasury investors, leading bonds to sell off and drive yields higher, has been expectations for increased deluge of issuance, 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.

Looking ahead, a partial shutdown of the federal government lies ahead if lawmakers don't agree on spending measures by midnight Thursday. The House passed a temporary bill late Tuesday (http://www.marketwatch.com/story/house-passes-temporary-spending-bill-to-avoid-shutdown-2018-02-06), and Senate Majority Leader Mitch McConnell, R-Ky., said he's "optimistic that very soon we'll be able to reach an agreement." 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).

Meanwhile, 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 strategists saying?

"Regarding the latest bond market selloff, we would point out that the 10-year yield, at 2.85%, remains well within our 2.75--3.25% forecast for year-end," wrote John Lynch, chief investment strategist for LPL Financial in a Tuesday research note. "The roughly 50 basis point (0.50%) jump in rates over the past three months is still well short of the swift 1% moves over 90 days in 2013 (the 'taper tantrum') and 2016 (presidential election). By historical standards, rates around 3% are still low and should not noticeably impair economic activity," he wrote. In 2013, then-Fed boss Ben Bernanke indicated the central bank was preparing to begin winding down its monthly asset purchases markets bond markets sold off sharply, pushing yields sharply higher.

What are other assets doing?

Stocks continued to be tempest tossed early Wednesday. Futures for the Dow were down by 57 points, or 0.2%, to 24,748, while S&P 500 futures shed 10 points, or 0.4%, to 2,684.25. Nasdaq-100 futures lost 17 points, or 0.2%, to 6,636.75.

The S&P 500 closed 1.7% higher on Tuesday, while the Nasdaq Composite gained 2.1%.


(END) Dow Jones Newswires

February 07, 2018 08:31 ET (13:31 GMT)

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