NEW YORK, Oct 7 (Reuters) - U.S. Treasury yields ambled higher on Monday ahead of remarks from Federal Reserve Chair Jerome Powell, U.S.-China trade talks and the auction of $78 billion notes and bonds this week.
The Fed chair’s remarks, the trade talks and auctions all should guide the market after data showing a slowdown in the U.S. manufacturing and services sectors last week drove yields down significantly.
The short end of the yield curve traded around 3 basis point higher early Monday, with the long end up about 2 basis points. The two-year yield, which last week fell 22.6 basis points, rose 3.6 basis points to 1.434%. The benchmark 10-year yield was up 2.2 basis points, having fallen 15.9 basis points last week as the Institute for Supply Management data reports fanned recession fears.
“It seems like we’re drifting higher without much of a clear direction. Even the curve seems to be largely unchanged. I think it’s quiet - then we have a couple of Fed things, and of course the U.S.-China trade talks later this week,” said Priya Misra, head of global rates strategy at TD Securities.
September’s employment report, released Friday, capped some of last week’s fall in yields, but although the headline data showed steady job growth, underlying figures were more ominous.
This week’s trade talks will offer the market some guidance on whether to expect the U.S.-China trade war to persist - and therefore a continued slowing of the U.S. economy. Powell’s remarks, as well as minutes from the last Fed policymaking committee released this week, will be watched for signs the central bank is considering an October interest rate cut.
Powell’s speech will also be parsed for insight into the Fed’s thinking about money markets, into which the Fed has been intervening to boost liquidity after evidence of stress in September.
Misra said she would be looking in Powell’s remarks for “any mention of the standing repo facility or how much (the Fed) might want to buy on the reserve front where they actually want to build a buffer.”
The auctions of three-, 10- and 30-year paper this week will also offer insight as to whether the Fed will continue offering daily repurchase agreement - or repo - operations.
“We’ll be watching dealer takedown because the repo issue highlighted that there are dealer balance sheet constraints. If the dealer takedown is decent, then I think that tells us that there could be more repo market stress, or the Fed may have to do more. That’s certainly something I’m watching beyond just how the auctions go,” said Misra. (Reporting by Kate Duguid Editing by Nick Zieminski)