The Senate is set to vote later today on a deal that would fund the government for two years and add $500 billion in new spending to a deficit already pegged at north of $1 trillion
Today the yield on the 10-year Treasury moved up 3 basis points, back above 2.80% to 2.83%, just about where it was before the flight to the safety of Treasuries sent yields back towards 2.70%
We won’t know exactly how much four-week Treasury paper the government will try to sell on Tuesday until Monday, but we already know that the short-term Treasury market is in trouble. With Congress still fighting over a bill to extend funding to keep the government open past the February 8 deadline, there’s not even a credible effort to raise the ceiling on what the government can borrow.
What was the difference between the slight slide in the Standard & Poor’s 500 stock index on Thursday–a drop of just 7.25 points or 0.27%–and the debacle on Friday when the S&P 500 fell 2.12% or 59.85 points to 2762.13? The financial sector. On Thursday the financials supported the entire market with the Financial Sector Select SPDR ETF (XLF) climbing 0.94% even as the S&P 500 was headed lower. On Friday, financials fell even harder than the overall market with the XLF ETF dropping 2.20%.
The U.S. economy added 200,000 jobs in January, the Bureau of Labor Statistics reported this morning. Economists surveyed by Briefing.com had expected the 180,000 net new jobs. The official unemployment rate remained at 4.1%. The big news, though–the news that has rattled the bond market–is the increase in average hourly earnings
As expected the Federal Reserve left interest rates unchanged today. But in its post-meeting statement the central bank added language that Fed watchers thought indicated four interest rate increases in 2018 rather than three. That language was enough to put the brakes on a good start to the day for stocks. The Standard & Poor’s 500, for example, dropped from 2832.94 at 2 p.m. New York time to 2813.45 at 2:50 on the Fed’s statement.
Last week we saw Treasury bond prices fall and their yields rise on weakness in the U.S. dollar. Today the dollar is stronger–up 0.31% on the Dollar Spot Index–but bond prices have still stumbled and yields on the 10-year Treasury have climbed to 2.7%, the highest level since early 2014.
What seems to be driving this dynamic is fear in the bond markets of end of the week data on the jobs market.
Today somebody in the Trump administration decided that the idea of the world’s biggest debtor nation talking down the value of its currency–as Secretary of the Treasury Steve Mnuchin did yesterday at the World Economic Forum in Davos–might be a bad idea. Overseas investors worried about a decline in the value of their dollar-denominated Treasuries would be certain to demand higher yields just as the Treasury was scheduled to sell $1 trillion in new Treasuries in 2018. So this afternoon President Donald Trump told CNBC that he favored a strong U.S. currency.
The dollar continued its fall today after European Central Bank president Mario Draghi voiced minimal concern over the rise in the euro. That currency topped $1.25 for the first time since 2014. The MSCI Emerging Markets Currency Index jumped 0.9%, its biggest leap in more than a year.
Another date to put on your investing calendar: January 31. That’s when the U.S. Treasury is scheduled to announced how it plans to finance the government’s huge revenue shortfall over the next three months. The betting on Wall Street is that the announcement will foreshadow a wave on new Treasury debt to be issued in 2018 that will double (at least) from 2017 to more than $1 trillion.
This morning the yield on the two-year Treasury note hit 2%. The yield on this shortish term Treasury, which is extremely sensitive to expectations on interest rate moves by the Federal Reserve, hasn’t seen 2% since September 2008. The yield on the two-year Treasury is now up 17 basis points in a month and 83 basis points in a year. That’s an extraordinarily fast climb in yields and remember that bond prices fall as yields rise
