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Bond Report: 10-year Treasury yield hovers above 0.6% as investors anticipate dimming economic outlook

Bond Report

Wells Fargo earnings highlights difficult economic backdrop

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U.S. Treasury yields fell Tuesday as investors looked past an increase in consumer prices amid signs that the prospects for a continued recovery were fading.

What are Treasurys doing?

The 10-year Treasury note yield

fell 3 basis points to 0.609%, and briefly flirted with levels last seen in April when the benchmark maturity traded below 0.6%.

The 2-year note rate

was down 0.8 basis point to 0.151%. The 30-year bond yield

tumbled 4.7 basis points to 1.290%. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

Consumer prices surged 0.6% in June, led by higher gasoline and food prices, after falling 0.1% in May. The core gauge stripping out for food and energy prices rose by a more modest 0.2%.

Prospects for fiercer inflation pressures could, in theory, weigh on trading for government bonds, but so far hasn’t hurt the prices for long-dated Treasurys as investors anticipate a sluggish recovery during the coronavirus crisis.

Tuesday’s round of bank earnings underscored the risks to the economy, as Wells Fargo shares

tanked after reporting a worse-than-expected loss in the second-quarter. Analysts also noted J.P. Morgan

and Citibank’s

earnings were given a lift by their fixed-income trading operations but that the boost would not last.

Tensions between and Washington loomed in the background, adding to the bullish tilt in the bond-market on Tuesday. Beijing announced sanctions against defense company Lockheed Martin, while Washington said it was preparing a paper that would officially reject China’s maritime claims in the contested South China Sea.

Investors also monitored the coronavirus trajectory in the U.S., which has reported 3.39 million confirmed cases of COVID-19 and at least 135,984 deaths, according to data aggregated by Johns Hopkins University. The worry is the lack of progress on the medical front is forcing state and local governments to institute stricter lockdown measures that could crimp consumer and business activity.

Dallas Federal Reserve President Robert Kaplan said Monday the U.S. economy was slowing down after rebounding sharply in May. He attributed the slowdown to the resurgence of COVID-19 and stressed that the public should wear masks.

What did market participants’ say?

“This recovery is likely going to take longer than many analysts originally thought, and the banks may have just given you the best of what they have for 2020,” said Kevin Giddis, chief fixed-income strategist at Raymond James. “

“Banks that serve more consumers than they do institutional fixed income customers didn’t fare as well,” said Giddis, noting the poor second-quarter results for Wells Fargo.

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