Treasury yields extended their descent Friday, capping a weeklong decline, after a spate of weak economic data, concerns over inflation expectations, and dovish central bank speeches drew investors into U.S. government paper.
The 30-year bond yield
fell 3.7 basis points to extend a weeklong 10.8 basis point drop to 2.802%, the largest five-day drop since March 24. Bond prices move inversely to yields; one basis point is one hundredth of a percentage point.
The yield on the 10-year Treasury note
slumped 3.4 basis points to 2.232%, contributing to a 8.7 basis point fall over the week. While, the 2-year note’s yield
edged lower 1.1 basis points on Friday and 1.6 basis point over the week.
Since Fed Chairwoman Janet Yellen testified to Congress midmonth, a run-up has taken over in both bonds and stocks. The S&P 500
gained around 2%, while the 10-year yield has slipped more than 10 basis points. Yellen’s note of caution over months of lackluster inflation has led investors to expect a slower pace of monetary tightening that could extend this “Goldilocks” environment that supports both assets.
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Moreover, the economic data that would have otherwise supported expectations for higher core inflation have also come up short. Falling import prices and a lower-than-expected reading on the home builders’ index have all taken a toll on inflation expectations.
On Friday, Treasury yields were weighed on by risk-off sentiment in Europe after currency markets cast doubt on just how dovish the European Central Bank can be despite President Mario Draghi emphasis on the lack of a pickup in underlying inflation.
euro, which reached a 2-year high on Thursday, slammed European equities to the benefit of the region’s bonds. Flighty investors rotated out of stocks to the embrace of government paper on concerns that the currency’s surge would hamper exports.
The 10-year German bund
slipped 2.8 basis points to 0.502%, while the Stoxx Europe 600
slipped about 1% lower.
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“It’s about the risk-off sentiment emanating from Europe,” said Aaron Kohli, fixed-income strategist at BMO Capital Markets.
Treasury yields tend to follow German bunds as interconnected financial markets have allowed traders to arbitrage interest-rate differential between countries.
U.S. government paper also received a tailwind after reports said President Donald Trump’s lawyers were investigating how to undermine the special counsel inquiry led by former FBI Director Robert Mueller. The move drew a modest flight-to-safety bid as geopolitical concerns from the White House refuse to abate. Trump’s pro-growth agenda has been sidelined as he struggles with allegations that members of his campaign team colluded with Moscow.
Looking ahead to next week, traders will closely eye the policy meeting for the Federal Open Market Committee, the Fed’s interest-rate-setting body. Economists have downgraded expectations that the central bank would announce the beginning of its balance sheet reduction soon. Some said they did not expect changes to the policy language, but it could include tweaks to their current outlook for the economy.
“Some folks may think the Fed could alter their inflation language, but we think material changes will only help cement the markets’ worry about inflation,” said Tom Porcelli, chief U.S. economist for RBC Capital, said in a note to clients.