Bond Report: Long-dated Treasury yields edge higher after biggest drop in nearly 6 weeks

What Treasury yields are doing

• The 10-year Treasury yields
  TMUBMUSD10Y,
  1.323%
  1.323%, compared with 1.308% on Monday at 3 p.m. Eastern Time. Yields and debt prices move in opposite directions.

• The 30-year Treasury bond yield
  TMUBMUSD30Y,
  1.856%
  rose to 1.857% from 1.847% a day ago.

• The 2-year Treasury note yields
  TMUBMUSD02Y,
  0.209%
  0.214%, unchanged from Tuesday afternoon.

• On Monday, yields for the 10- and 30-year Treasury debt posted the biggest one-day yield decline since Aug. 13 and the 2-year notched its largest daily rate drop since Aug. 30.

What’s driving the market?

U.S. markets were calmer Tuesday after the biggest one-day fall in Treasury yields in about six weeks on Monday.

In addition to the Federal Open Market Committee meeting that got under way in Washington on Tuesday, Treasury’s $24 billion in 20-year bonds “was solid,” according to strategist Ben Jeffery of BMO Capital Markets, though it resulted in little broad price action.

Monday’s flight to safe-haven assets was partly precipitated by fears about the implosion of China property developer Evergrande Group. On Tuesday, Hui Ka Yan, chairman of the company, said it is dealing with unprecedented difficulties and its employees are facing severe challenges, but vowed to emerge from the crisis.

Evergrande is said to have missed interest payments to at least two of its bank creditors on Monday, Bloomberg reported, citing people familiar with the matter.

Read: Will Evergrande be China’s ‘Lehman moment’? Wall Street says no

The challenges for the highly indebted Evergrande come as China clamps down on the use of excessive leverage by property developers in the country, and its problems have amplified concerns about a recovery in the world’s second-largest economy in the wake of the COVID-19 pandemic.

Meanwhile, financial markets are vulnerable to volatility as they anticipate the outcome of the Federal Reserve meeting this week, where there’s a slight risk that policy makers could announce plans to taper $120 billion in monthly bond purchases.

See: Powell to seek compromise tapering plan

The Fed’s projections for interest-rate increases could also cool buying in Treasurys and push yields higher. For the first time on Wednesday, Fed officials will pencil in their outlook for interest rates in 2024.

Also read: Fed could fracture in 2022 over when to raise interest rates, economist says

Investors also are watching developments with the U.S. federal debt ceiling, amid concerns that the government will face a shutdown. The Wall Street Journal reported that Democratic leaders would attach a suspension of the debt limit through December 2022 to a short-term spending bill, which could set up a clash with Republicans over preventing both a partial government shutdown and a potential U.S. debt default. The House is expected to vote on the combined measure this week.

In U.S. data releases on Tuesday, home builders picked up the pace of new-home construction and permitting in August, with a sharp focus on multifamily housing.

Home builders started construction on homes at a seasonally-adjusted annual rate of 1.62 million in August, representing a 3.9% increase from the previous month’s upwardly-revised pace, the Census Bureau reported. Permitting for new homes occurred at a seasonally-adjusted annual rate of 1.73 million, up 6% from July and 13.5% from a year ago. 

What analysts are saying

• In the run-up to Wednesday’s FOMC decision, “markets are already largely looking beyond the forthcoming tapering process,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management. The big risk for this meeting “is that we get a repeat of the June meeting, in that the Fed executes another hawkish pivot via higher rate projections despite no real improvement or changes to their economic projections.”

• “The threat of a government shutdown in the U.S. as Congress has not yet been able to resolve the lingering debt-ceiling issue adds to market participants’ list of concerns,” wrote analysts at UniCredit in a Tuesday research note.

• U.S. policy makers and regulators “have survived a number of stress tests since 2008 that make the financial system better capitalized, more decentralized, and more resilient to shocks,” said Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments. “This makes U.S. leverage much less brittle relative to what we have in China.”