Bond Report: Treasury yields lifted by Yellen’s support for further rate hikes

Treasury yields rose on Monday, a day after Federal Reserve Chairwoman Janet Yellen reaffirmed the possibility of another interest rate increase this year.

What are Treasury yields doing?

The 2-year note yield

TMUBMUSD02Y, +1.37%

sensitive to shifting expectations for monetary policy, added 3 basis points to 1.522%.

But action for long-dated government paper was more muted, reflecting trader skepticism of Yellen’s belief that inflationary pressures would resurface. The 10-year benchmark Treasury yield

TMUBMUSD10Y, +0.67%

rose a basis point to 2.292%, while, the 30-year bond

TMUBMUSD30Y, +0.50%

 icked up a basis point to 2.825%.

What’s driving markets?

Fed Chairwoman Janet Yellen on Sunday reiterated her support for gradual rate increases and her belief that tightness in labor markets would eventually translate into inflation. Her comments follow in the wake of a weaker than expected inflation reading on Friday. But investors feel the disconnect between the lackluster economic data and the Fed’s insistence that low inflation is transitory is at stretching point, capping any move toward higher long-dated yields.

See: Gradual rate hikes should help sustain economic growth, Yellen says

What did market participants say?

“If the FOMC is willing to ignore the disappointing string of core inflation figures seen during 2017 and continue delivering rate hikes, then the ‘mystery’ of inflation becomes more of an academic exercise than a market event,” wrote Ian Lyngen and Aaron Kohli, fixed-income strategists at BMO Capital Markets.

“Historically, whenever inflation was flagging and an economic expansion was growing a bit long-in-the-tooth, one might have reasonably assumed that monetary policy officials would pause to more fully assess the impact of prior rate hikes.”

What data is on investors’ radar?

The Empire State manufacturing index jumped to a three-year high of 30.2 in October from 24.4 in September. A snapshot of manufacturer’s health in New York state, any number above zero indicates better economic conditions.

Which central bankers are on the docket?

Minneapolis Fed President Neel Kashkari, a voting member of the Federal Open Market Committee this year, will appear at a question-and-answer session at 9 p.m. Eastern

How are other assets doing?

The dollar

DXY, +0.05%

rose slightly after Yellen’s hawkish remarks, pushing the euro

EURUSD, -0.1015%

lower. Despite the greenback’s recent strength, gold

GCZ7, +0.27%

continued to climb above $1300 per ounce. Crude oil

CLX7, +1.61%

was on track to notch a three-week high.