Treasury yields decline on first day of holiday-shortened week

Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) at the opening bell, October 25, 2018 in New York City.
Drew Angerer | Getty Images

Treasury yields fell on Tuesday as a return of volatility in equity markets spurred a shift toward the relative refuge of government debt.

The U.S. bond market, which was closed Monday due to the Veterans Day holiday, had its first chance to react to the prior session's 600-point drop in the Dow Jones Industrial Average and a broad sell-off in technology stocks.

The yield on the benchmark 10-year Treasury note fell to around 3.143 percent, while the yield on the 30-year Treasury bond dropped to 3.363 percent. The 2-year note yield fell about 3 basis points to 2.895 percent. Bond yields move inversely to prices.

Investor sentiment has been shaken in recent weeks on fears that the Federal Reserve may be tightening monetary policy too quickly. The U.S. central bank is expected to hike interest rates in December as well as multiple times in 2019.

Fed officials, who attempt to keep unemployment low and inflation moderate, have gradually increased interest rates under Fed Chair Jerome Powell as they try to prevent the U.S. economy from overheating. But with the gradual increases to the federal funds rate, some investors have grown anxious that the central bank could tighten financial conditions too much and cause a destructive contraction in corporate profits.

"I think given the equity reaction yesterday, the Treasury move today makes sense," said Priya Misra, head of global rates strategy at TD Securities. That short-term Treasury rates appear to be dropping the most on Tuesday hints that bond traders may think Fed leaders could point to the recent stock turmoil as reason to quiet its hawkish commentary, Misra said.

"Powell speaks after the market closes on Wednesday, and the big question is: Does he reiterate his Oct. 3 comments that the Fed is 'a long way' from neutral," she added. "We're thinking Powell will take a more data-dependent stance."

The Fed Chair is scheduled to discuss the economy Wednesday at 6:00 p.m. ET and may attempt to soften his remarks from last month that suggested the the central bank could temporarily buoy rates above a neutral level, the rate threshold that neither stimulates nor restrains economic growth.

The U.S. central bank left rates unchanged as expected last week, but maintained its plans to hike interest rates, saying it saw "further gradual increases" ahead. As for economic data, Federal budget data and senior loan officer survey figures are due today at 2 p.m. ET.

Risk sentiment was helped Tuesday after The Wall Street Journal and Bloomberg News reported that Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He had spoken over the phone on Friday concerning trade. That news came after a separate report that said President Donald Trump intends to meet with his trade team on Tuesday to discuss a draft report on European auto tariffs.