T-bond rates likely to rise as US Treasuries move up

TREASURY BONDS (T-bonds) on offer this week might fetch higher yields, with rates of US securities also moving higher.

The Bureau of the Treasury is looking to raise P15 billion in the re-issued ten-year debt papers on Tuesday, which have a remaining life of nine years and six months.

The papers were first awarded in May and were returned on the auction block on Sept. 19 with an average rate of 4.627%. This is lower than the 4.718% rate fetched on the bonds offered on Aug. 22.

Traders interviewed on Friday said the debt notes will likely see rates moving sideways, with a slight upward bias, as the US Treasury late last month saw ten-year debt paper yields increase to its highest level since March.

“We saw the US Treasury [yields] land on the 2.45[%] level, breaching the 2.4% benchmark this year,” a trader said in a phone interview.

The record-breaking US yields were mainly driven by the speculations over the next Federal Reserve chair, with a hawkish candidate John B. Taylor as a prevailing name during that time.

However, US President Donald J. Trump on tapped Fed Governor Jerome Powell to become head of the US central bank, breaking with precedent by denying Janet L. Yellen a second term but signalling a continuation of her cautious monetary policies.

Mr. Powell, 64, a lawyer and investment banker appointed to the Fed board in 2012 by then-President Barack Obama, emerged as Mr. Trump’s choice from a slate of possible nominees that included Ms. Yellen and others who may have pursued a sharp policy shift.

In an announcement at the White House, Mr. Trump described the soft-spoken Mr. Powell as a smart and committed leader who would build on Ms. Yellen’s achievements in steering the US economy after the recovery from the 2007-2009 financial crisis.

“President Trump’s appointment of Powell indeed left an uncertainty over the bond markets,” another trader noted.

The “dovish” stance of Mr. Powell, which may blur the possibility of a Fed rate hike at the end of the year, might be tempered by the upbeat economic data released last week. Non-farm payrolls in October jumped to 261,000, a surge from the 18,000 jobs recorded a month ago. US unemployment rate plunged to 4.1%, the lowest since December 2000.

Mr. Trump’s nomination of Mr. Powell as the next Fed chair on Thursday was greeted with a potentially ominous signal from the bond market: the US Treasury yield curve flattened.

The shape of the Treasury yield curve, which plots the yields of the various debt securities issued by the US government, often reflects investors’ perceptions of the health of the economy and the outlook for inflation.

A steeper curve, when long-term yields rise relative to shorter-dated yields, typically augurs brisker economic growth and inflation. A flatter one, when the gap between short and long term yields narrows, most often occurs as the Fed is raising short-term interest rates as it is now, and signals a muted outlook for both growth and inflation.

Bond investors are gearing up for a flatter yield curve as Mr. Powell is widely expected to continue to raise interest rates gradually, as Ms. Yellen began to do in late 2015, and to shrink the central bank’s $4.5 trillion balance sheet. – K.A.N. Vidal with Reuters