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BOND REPORT: Treasury Yields Pare Decline After Fed Minutes Highlight Divide Over Pace Of Rate Hikes1-3-18 3:22 PM EST

By Mark DeCambre and William Watts, MarketWatch

Treasury prices pared modest gains Wednesday, leaving yields slightly lower, after minutes of the Federal Reserve's December policy meeting highlighted a division over the central bank's forecast for three rate increases in 2018.

What are Treasurys doing?

The 10-year Treasury yield fell 0.6 basis point to 2.457%. The yield is hovering near the same level it was a year ago.

The 30-year bond yield slipped 1.7 basis points to 2.797%.

The 2-year note yield edged up 0.4 basis point to 1.927%.

Bond prices move inversely to yields.

What's driving the market?

The minutes unveiled two camps, both uncomfortable with the Fed's December forecast of three rate increases in 2018--with one faction worried the pace might be too aggressive, while another feared it would be too slow.

Read:Fed minutes show divide over forecast of three rate hikes this year (http://www.marketwatch.com/story/fed-minutes-show-divide-over-its-own-forecast-of-three-rate-hikes-this-year-2018-01-03)

According to CME Group data, market participants are expecting the next rate increase, after the Fed's recent quarter-percentage point increase to a range between 1.25% and 1.5%, to occur in March.

What has been viewed as muted moves in Treasury yields come as the dollar, as gauged by the ICE U.S. Dollar Index , has been near its lows for September at 92.07, despite tax-cut legislation and other fiscal stimulus measures which were expected to boost the buck. The dollar regained some ground on Wednesday, extending gains in the wake of the minutes.

Traders also focused on geopolitics, as thousands of people took to the streets of Iran on Wednesday, voicing support for Supreme Leader Ayatollah Ali Khamenei, following what has been the largest wave of antigovernment unrest in almost a decade (https://www.wsj.com/articles/economics-dissatisfaction-with-current-regime-fuel-iran-protests-1514679332).

Meanwhile, North Korea reopened communications with its neighbor the South, highlighting signs of relaxed tensions on the Korean Peninsula (https://www.wsj.com/articles/north-korea-revives-hotline-for-talks-with-south-1514957698).

What does the data show?

The December Institute for Supply Management manufacturing index came in at 59.7% (http://www.marketwatch.com/story/us-manufacturing-surges-in-december-ism-shows-2018-01-03), up from 58.2% in November and marking the strongest year for the activity gauge since 2004, according to FactSet. A figure above 50% indicates activity is expanding.

The Commerce Department said construction spending rose 0.8% (http://www.marketwatch.com/story/construction-spending-throttles-past-expectations-in-november-led-by-residential-building-2018-01-03) in November, surpassing expectations for a 0.5% rise.

What are strategists saying?

The December ISM reading "is the thin air of the high peaks," wrote Wells Fargo economists John Silvia and Tim Quinlan, in a note. "It is quite uncommon for the ISM index to remain so firmly in expansion territory for such a long period of time. The only other time in the past 40 years that the ISM came in at 58 or higher for this many consecutive months was a streak that lasted from November 2003 to August 2004."

What other assets are in focus?

The German 10-year bond yield, known as the bund , and serving as a proxy for the health of the eurozone economy, was at 0.439%, versus 0.433% on Tuesday.

 

(END) Dow Jones Newswires

January 03, 2018 15:22 ET (20:22 GMT)

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