Bond Report: Yield On 10-year Treasury Closes At Highest Level In Five Months

U.S. Treasury yields rose Monday in a holiday-truncated week as traders made room for a sale of short-term government debt in the afternoon.

Analysts warned that trading volumes is thinning out as investors vacate their offices for Christmas.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.36%   rose 1.8 basis points to 1.934%, its highest since July 31, while the 2-year note rate TMUBMUSD02Y, -0.10%  gained 2.7 basis points to 1.654%. The 30-year bond TMUBMUSD30Y, -0.60%  ticked 1.7 basis points higher to more than a five week high of 2.362%.

The Securities Industry and Financial Markets Association recommends that bond-trading closes at 2 p.m. Eastern on Tuesday, and for the market to remain shuttered on Wednesday.

See: Here’s when markets will be closed for Christmas and the New Year

What’s driving Treasurys?

The bond-market softened up in the face of a round of debt auctions this week, with investors taking down a sale of $40 billion of 2-year notes on Monday.

As part of the “concession” process, broker-dealers try to push rates higher to ensure a successful debt auction and thus avoid taking too much of the supply onto their own balance sheets, which have been clogged up with Treasury issuance.

Over the weekend, China cut tariffs on U.S. goods including frozen pork and other consumer items starting on Jan. 1, according to state-run Xinhua News Agency, an indication that a phase one trade deal is near. Risk sentiment has improved since the announcement of the preliminary tariff agreement, helping to spur major stock benchmarks to new heights.

Read: Stock market set to carve out fresh records to start Christmas week trade

Investment spending has taken a hit since the onset of trade tensions between the two largest economies in the world, and could be set to recover once the U.S.-China trade spat starts to de-escalate. But Boeing’s halt to new production of their 737 MAX plane could hamstring a recovery in capital expenditures, and inflict broader damage to the economy.

Investors handled some important economic data, with durable goods shrinking 2% in November, the largest drop in six months. A key data subset of the report, core capital goods shipments, which excludes volatile defense and aircraft spending, was down by a more modest 0.3%. New home sales numbers from November rose 1.3% to an annualized pace of 719,000.

The Chicago Fed National Activity Index surged to a yearlong high of 0.56 in November, from a reading of negative 0.76. The gauge tracks economic activity and inflationary pressures across the U.S.

What did market participants’ say?

“With all we know priced in the market, we will need to see legitimate outcomes [on trade] and improvement in global economic fundamentals to break these levels” before the 2-year/10-year spread can break above 30 basis points and the 10-year note yield can push above 2%, wrote Gregory Faranello, head of U.S. rates for AmeriVet Securities, in a note.

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