U.S. Treasury yields retreated from year-to-date highs on Tuesday, Aug. 18, as trading desks navigated light economic data, persistent geopolitical tensions over the Strait of Hormuz, and anticipation surrounding upcoming Federal Reserve minutes.
Treasury Yields Pull Back from Year-to-Date Highs
U.S. borrowing costs backed off their session peaks on Tuesday following two straight upward trading sessions, switching directions amid a global bond sell-off that saw long-term borrowing costs in major economies edge toward their highest levels in decades. The benchmark 10-year Treasury note yield slipped 1.6 basis points to 4.708%, retreating from an earlier year-to-date high of 4.74% before closing near the key 4.70% level, according to Todd Colvin of Mark IV Brokerage. Colvin highlighted how the CVOL index tracked this movement, with volatility easing as yields pulled back.
Further out on the curve, the yield on the 30-year bond fell 2.6 basis points to 5.284%. Meanwhile, the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 0.5 basis points to 4.177%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 52.9 basis points.
Geopolitical Headwinds and Thin Summer Trading
The change in sentiment came amid a week light on economic data or other catalysts to set a firm direction in thin summer trading, leaving markets to parse the latest developments in the U.S.-Iran conflict, analysts said. U.S. President Donald Trump said Tuesday no talks were taking place with Iran and none were scheduled, while insisting that the Strait of Hormuz was open, contradicting an Iranian assertion that the waterway remained closed to shipping.
Crude back above $91 is feeding the same fiscal and inflation story that has the 30-year at a 19-year high. Reporting was provided by Douglas Gillison in Washington, with editing by Sharon Singleton and Aurora Ellis.
“Economic data is light and malaise is high and between those two a gentle breeze could move things.”
Guy LeBas, chief fixed income strategist at Janney, via Reuters
Cooling Industrial Growth and Fed Policy Focus
Meanwhile, the Federal Reserve reported that July growth in U.S. industrial production had cooled by a tenth of a percentage point to 0.2%, undershooting economists’ expectations in part due to a decline in production of consumer goods.
Markets on Wednesday will turn to the Federal Reserve’s release of minutes from the most recent meeting of its monetary policy-setting Federal Open Market Committee for clues as to policymakers’ views on the path of interest rates. FOMC minutes Wednesday can either confirm that the three July dissenters were alone or show the committee is more worried than the vote suggested.
Gold Caught Between Long-Term Resistance and Front-End Buyers
Daily Spot Gold (XAU/USD) is edging lower on Tuesday. The main trend is up, but traders are struggling to take out $4449.83 to reaffirm the uptrend. The trend will turn down on a move through the last swing bottom at $4311.04. The long-term range is the April 17 main top at $4891.54 and the June 30 main bottom at $3942.10. Its 50% level at $4416.82 has been providing resistance for six straight sessions. Additional resistance is the 200-day moving average at $4507.45. The longer-term bulls are hoping for a breakout over this indicator in order to draw in the institutions. The short-term range is $3942.10 to $4449.83. If the trend changes to down then its retracement zone at $4195.96 to $4136.05 along with the 50-day moving average at $4150.57 will become the primary target zone.
The long bond is running this trade. Gold has the softer dollar and the lower hike odds and neither one has been enough to push through six sessions of resistance. Gold is stuck between a front end that favors buyers and a long end that will not let them through. The 200-day overhead is where the trade changes. The swing bottom below is where it breaks. The bond market picks the direction. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.277% after closing at 2.253% on August 17. The 10-year TIPS breakeven rate was last at 2.3%, indicating the market sees inflation averaging about 2.3% a year for the next decade.
Wednesday’s Bond Auction and Market Catalysts
Finally, Colvin outlines key events for Wednesday, including a 16 billion 20-Year auction and the release of the July FOMC minutes. The U.S. is also due to auction 20-year bonds.
