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The yield on 10-year Treasurys jumped back above 3% early Wednesday in New York as traders sold the benchmark note ahead of an auction of $25 billion in long-dated government paper. Government debt also came under selling pressure as assets perceived as risky, like stocks, saw a pickup in demand, which can undercut appetite for assets perceived as havens like bonds.

The trading action came as Wall Street investors absorbed President Donald Trump’s decision to pull the U.S. out of the Iran nuclear deal and the possible knock-on effects the exit could have on the broader market and economy.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +0.57% climbed 4.3 basis points to 3.008%, reclaiming the 3% level. On April 25, the benchmark yield rose above 3% for the first time since December 2013, but has since struggled to stay above that handle.

The 30-year bond yield TMUBMUSD30Y, +0.53% rose 3.8 basis point to 3.161%, while the 2-year note yield TMUBMUSD02Y, +0.66%  was up 0.4 basis points to 2.526%.

What is driving the market?

Investors were selling U.S. government bonds as investors positioned themselves ahead of an auction of $25 billion in 10-year notes at 1 p.m. Eastern Time on Wednesday. That sale comes just a day ahead of $17 billion auction of 30-year bonds set for Thursday.

Additionally, traders were digesting Trump’s move on Tuesday to withdraw the U.S. from the Iran nuclear deal and announce plans to reimpose sanctions on the Middle Eastern country. The decision sparked a rally in crude-oil prices, as fresh sanctions are expected to curb Iran’s oil exports and lead to tighter global supply.

The rapidly rising oil prices could boost U.S. inflation and add pressure on the Fed to hike rates more aggressively. Crude oil CLM8, +2.87% jumped 2.6% to $70.82 on Wednesday, trading around its highest level since November 2014.

Wall Street has priced in a near-certain likelihood of a rate increase at the conclusion of the Fed’s two-day meeting ending June 13, according to CME Group data.

The selloff in government debt also came as the U.S. dollar retreated from its recent string of gains, with the buck off 0.1% at 93.02, as measured by the ICE U.S. Dollar Index DXY, -0.01%

What are strategists saying?

The dollar “continued drifting north in the aftermath of the [Iran] decision, while the U.S. 10-year treasury yields rose to just a tick below the key psychological zone 3%. Once again, this might be due to concerns over inflationary pressures resulting from rising oil prices,” said Charalambos Pissouros, senior market analyst at JFD Brokers, in a note.

“Expectations of inflation rising faster than previously anticipated mean expectations of faster rate hikes by the Fed. Indeed, according to the Fed funds futures, the probability for the Fed to end the year with a total of 4 hikes has risen to 42% from 39% yesterday morning,” he added.

What else is on investors’ radar?

The producer-price index for April is slated for release at 8:30 a.m. Eastern Time followed by wholesale inventories numbers from March at 10 a.m.

Atlanta Federal Reserve President Raphael Bostic is expected to give a speech on the economy and policy outlook the River Club in Jacksonville, Fla., at 1:15 p.m.


Posted by Narbik Karamian on May 9th, 2018 8:43 AMLeave a Comment

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