Bond Report: 2-year Treasury yield posts biggest weekly jump in a month

Treasury yields fell Friday as simmering trade tensions buoyed demand for haven assets like long-dated bonds. The flight to quality kept a lid on yields for long-end debt for the week despite a six-year high in consumer prices.

On the other hand, the short-end of the bond market rose after senior Federal Reserve officials highlighted the positive growth outlook and the need to hike rates at the current pace.

What are Treasurys doing?

The 2-year note yield TMUBMUSD02Y, -1.09% sensitive to shifting expectations for Fed policy, fell 1.2 basis points to 2.582%, trimming its weeklong rise to 3.9 basis points.

The 10-year Treasury note yield TMUBMUSD10Y, -0.62% fell by 2.2 basis points to 2.831%, leaving it flat for the week.

The 30-year bond yield TMUBMUSD30Y, -0.46%  slipped 1.7 basis point to 2.933%, its lowest level since Jan 26, contributing to a weeklong decline of 0.7 basis points.

Bond prices move in the opposite direction of yields.

What’s driving markets?

Long-dated Treasury yields struggled to take off this week when the U.S. released its list of tariffs on $200 million in Chinese imports late Tuesday, keeping up the trade spat between the two economic powerhouses and stoking appetite for haven assets like U.S. government paper.

Yet in the face of intensifying tariff tensions between U.S. and other major economies, several speeches by senior Fed officials showed the central bank remained sanguine about the economy’s prospects, suggesting their strong intentions to stick to their gradual and steady rate increase path. The hawkish speeches helped to flatten the so-called yield curve by pushing up short-term rates faster than longer-term rates.

The yield curve, otherwise seen as the spread between short-dated yields and long-dated yields, has narrowed on combined expectations for continued Fed tightening and an uptick in demand for haven investments. Inflows into U.S. bond funds and exchange-traded funds rose to $4.99 billion this week, the highest level since April, EPFR data shows.

The yield gap between the 2-year note and the 10-year note has thinned to about 25 basis points, or a quarter of a percentage point, from 30 basis points at the start of the week.

Read: 5 key ways Wall Street and economists think about the yield curve

The U.S. central bank released its semiannual monetary policy report, ahead of the two-day Humphrey-Hawkins hearing starting on July 17 where Fed Chairman Jerome Powell will testify in front of Congress. The report said there was no need to speed up the pace of rate increases after inflation hit the 2% target as the uptick in price pressures was largely expected. The Fed forecasts its favorite measure of inflation, the personal-consumption expenditure price index, the bank’s preferred gauge of inflation, will remain at 2.1% this year and in 2019, and 2020.

See: Fed tells Congress the inflation pickup seen this year is not a surprise

President Donald Trump was on his first official visit to the U.K. After his arrival at Chequers, the U.K. prime minister’s country house, Trump said Britain’s chances of a trade deal with the U.S. could be torpedoed by Prime Minister Theresa May’s approach to Brexit negotiations. Market participants have sought clarification on details of May’s vision for a “soft Brexit” where the U.K. would remain in the European Union’s custom union, as the deadline to leave the European Union looms.

However, Trump was seen as backtracking on the criticism on Friday, saying at a joint news conference that he still supports a post-Brexit trade deal with the U.K.

Also check out: Trump rips Theresa May, says ‘soft’ Brexit would ‘kill’ any future U.S.-U.K trade deal

What did market participants say?

“The semi-annual Monetary Policy Report (MPR) released late this morning acknowledges that economic growth has accelerated since the first half of 2017 and although there is lip service paid to the downside risks presented by further escalation of the ongoing trade war and the associated tit-for-tat tariffs, the outlook for continued growth is solid. The report also characterizes the labor market as near or past the point of full employment and shows that the Fed is optimistic that inflation will continue to rise on track with their expectations,” said Ward McCarthy, chief financial economist at Jefferies, in a Friday note.

What else is on investors’ radar?

On the data front, the University of Michigan consumer-sentiment index fell in July to 97.1, below June’s reading of 98.2. While, import prices fell by 0.4% in June.

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