Treasury prices rose on Monday, pulling down yields, as a round of weaker-than-expected data out of China and headlines around the Taliban’s seizure of power in Afghanistan soured investor appetite for riskier assets for part of the day.
What are yields doing?
The yield on the 10-year Treasury note
fell to 1.255% from 1.297% at 3 p.m. Eastern on Friday. Yields and debt prices move in opposite directions.
The 2-year note yield
declined to 0.205% from 0.215% Friday afternoon.
The yield on the 30-year Treasury bond
was at 1.923%, compared with 1.948% late Friday.
The 10- and 30-year rates each had their largest two-day declines since July 19, based on 3 p.m. levels, according to Dow Jones Market Data.
What’s driving yields?
China data appeared to be setting the tone across global financial markets early Monday. July data showed retail sales and industrial production disappointed, along with a January-to-July measure of fixed-asset investment.
Analysts said headlines around the weekend collapse of the Afghanistan government as Taliban forces took over Kabul may also have been a factor souring overall market sentiment, providing some support for safe-haven assets like core government bonds.
See: Will Afghanistan collapse tarnish the U.S. dollar and other assets?
In the U.S., the New York Empire State factory index tumbled in August from last month’s record high. The headline general business conditions index fell 24.7 points to 18.3 in August, the regional Fed bank said Monday.
The data comes on the heels of a Friday reading of the University of Michigan’s preliminary August reading on consumer confidence, which unexpectedly dropped to its lowest since December 2011.
Meanwhile, The Wall Street Journal reported that Federal Reserve officials were near agreement to start scaling back easy money policies in about three months if the economic recovery continues, with some pushing to end the central bank’s asset-buying program by the middle of next year. A string of strong employment reports are strengthening the argument for the Fed to announce its intentions to start tapering at its next meeting on Sept. 21-22, the report said.
Read: Worries about global growth outweigh report Fed moving closer to faster-than-expected tapering process
What are analysts saying?
“Geopolitics (Taliban taking control of the Afghan capital Kabul) and slowing Chinese growth momentum at the start of Q3 dampen the general risk mood,” wrote analysts at KBC Bank in Brussels, in a note. China’s retail sales, industrial production and other data all disappointed in July, they noted. “The delta variant outbreak is the main culprit, especially for the hit on consumption.”
“Rather than taking a U.S.-centric view of the impact of Afghanistan on rates and currencies, the better observation is chaos for 38 million situated between Pakistan and Iran further destabilizes a world still giving ground to the pandemic,” Jim Vogel of FHN Financial wrote in a note on Monday. Meanwhile, on the Fed front, “even though few now expect a tantrum when the taper is formally announced, bond traders will use any excuse to anticipate actual rate hikes and steepen the curve. The pivot for rates will be whether investors respond to steepening by putting excess cash to work out the curve.”
“Today’s moves may be just in response to what’s going on overseas, in Afghanistan,” said David Petrosinelli, a senior trader at InspereX. “But at the end of the day, it’s hard to see rates sitting where they are sitting today given the drumbeat of price input announcements coming in. It’s going to be very hard for the Fed to not be more forceful and deliberate about tapering, which is the first step prior to a hike.” Petrosinelli said that “the problem you have when you run out of tools and leave rates for an extended time near zero, is that, by all measures, it stunts growth as banks will find it increasingly difficult to lend to businesses at unattractive rates. The longer you throw maximum policy accommodation at an economy that doesn’t appear to need it, the greater the risk of creating stagflation pressures. That’s not the issue now, but if the Fed waits too long, anything is possible. Once inflation is out there, it gets tougher to quell and hard to take away.”