2-9-18 2:45 PM EST | Email Article

By William Watts, MarketWatch

Supply worries, inflation concerns pushed up yields, contributing to the equity selloff

Treasury yields pulled back from their highs on Friday as stocks swung back into positive territory but remained on track to post their worst week in years.

What yields doing?

The yield on the 10-year Treasury note was down 1.4 basis point to 2.833%, according to Tradeweb. The yield hit a four-year high of 2.880% on Monday.

The 2-year note yield fell 6.5 basis points to 2.069%, while the 30-year Treasury bond yield was up 0.4 basis point at 3.141%.

Yields move in the opposite direction of debt prices.

What's driving the market

Yields saw their climb erased on Friday as U.S. stocks swung between gains and losses, reflecting the tug of war between a classic flight to quality response and growing fears bonds are in a bear market.

But overall, elevated yields have been blamed for kicking off a stock market rout that's left the Dow Jones Industrial Average looking at its biggest weekly percentage loss since Oct. 2008.

Rates have traveled higher on a variety of concerns raging from rising inflation expectations, expansionary fiscal spending and rising bond issuance.

Stronger-than-expected wage growth data for January last week stoked inflation expectations, underlining worries the Federal Reserve would prove more aggressive than anticipated in lifting interest rates. Stronger price pressures can erode the value of a bond's fixed interest payments.

President Donald Trump signed off on a two-year budget deal (http://www.marketwatch.com/story/senate-passes-budget-deal-as-government-remains-shut-down-2018-02-09) on Friday that raises both military and domestic spending and ended a brief government shutdown. That could prove ill-timed when the economy is already nearing full capacity and further fiscal stimulus could cause growth to overheat.

Read:With federal spending on the loose, are bond vigilantes set to make a comeback? (http://www.marketwatch.com/story/with-federal-spending-on-the-loose-are-bond-vigilantes-set-to-make-a-comeback-2018-02-09)

The deal is expected to add to the deficit. Analysts at Bank of America Merrill Lynch boosted their fiscal 2018 and 2019 deficit forecast by $35 billion and $20 billion, respectively. That would put the 2018 gap at $825 billion and the 2019 deficit at $1.07 billion.

Treasury issuance was already set to rise this year before the passage of a sweeping tax overhaul in December that's slated to significantly add to the deficit.

What are analysts saying?

"We continue to argue that accelerating inflation, robust growth outlook and expansive financial conditions facilitate continued Fed rate hikes (we now expect four this year) and together with an increasing bond supply speaks in favor of higher U.S. rates," said Lina Fransson, fixed income strategist at SEB in Stockholm, in a note.

"I've heard some folks glibly say "inflation", but that's stupid as the Fed will react, bond yields soar, and there's your recession. The larger auctions in the coming quarters will tell the story," said David Ader, chief market strategist for Informa Intelligence, in a note.

What else is on investors' radar?

Kansas City Fed President Esther George said the recently passed fiscal stimulus will push the central bank to continue on its rate hiking trajectory, Reuters reported (https://www.reuters.com/article/us-usa-fed-george/feds-george-says-fiscal-stimulus-means-rate-hikes-important-idUSKBN1FT096?il=0).


(END) Dow Jones Newswires

February 09, 2018 14:45 ET (19:45 GMT)

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