2-9-18 8:29 AM EST | Email Article

By William Watts, MarketWatch

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

Treasury prices erased a modest decline to turn higher early Friday, pulling the yield on the 10-year note slightly lower, as U.S. stock-index futures erased gains, pointing to the danger of further pain on Wall Street.

What yields doing?

The yield on the 10-year Treasury note was off about 1.2 basis points at 2.815%, while the 2-year note yield was virtually flat at 2.106%. The 30-year Treasury bond yield was off 0.7 basis point at 3.124%.

Yields move in the opposite direction of debt prices.

What's driving the market

Yields saw their rise trimmed or erased late Thursday as U.S. stocks tanked, reflecting some haven flows as equity selling gained steam. But overall, rising yields have been blamed for kicking off a stock market rout that's left the S&P 500 index on track for its worst week since August 2011 and the Dow Jones Industrial Average looking at its biggest weekly percentage loss since October 2008.

Rising inflation expectations were stoked last week by stronger-than-expected wage growth data for January, underlining worries the Federal Reserve would prove more aggressive than anticipated in lifting interest rates.

Supply worries have also been cited as a concern. 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.

The House passed a two-year budget deal early Friday (http://www.marketwatch.com/story/senate-passes-budget-deal-as-government-remains-shut-down-2018-02-09) alongside a spending bill that will end an hourslong government shutdown, sending the legislation to President Donald Trump for his signature.

The deal, however, is expected to further 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.

What are analysts saying?

"Higher deficits necessitate greater Treasury supply and we will modestly revise our coupon bill size expectations as a result," wrote analysts BAML analysts Mark Cabana and Joe Song, in a note. "We expect the Treasury will look to boost its bill financing as early as next week and see risks to more near-term supply due to a higher cash balance. These developments further our view for higher Treasury rates, a steeper curve, and cheaper Treasurys vs. OIS (overnight interest swaps), especially at the front end."

"Although the slide in the U.S. equity market saw bond yields come off their highs, the 10-year Treasury yield [remains] well above the lows seen earlier in the week, suggesting that the current selloff in the bond market has legs (at least in advance of next Wednesday's U.S. CPI report)," wrote Chris Scicluna, head of economic research at Daiwa Capital Markets Europe, in a note.

"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. "However, despite recent market concerns, we expect inflation expectations to remain under control with a bear flattening of the curve driven by Fed rate hikes."

What's on the economic docket?

The only U.S. data point on the docket is December wholesale trade at 10 a.m. Eastern.


(END) Dow Jones Newswires

February 09, 2018 08:29 ET (13:29 GMT)

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