Treasuries Whipsaw on Geopolitical Risks, Hawkish Fed Officials

(Bloomberg) -- Treasuries swung between gains and losses, rallying on a report that China’s Navy seized a drone deployed by a U.S. oceanographic vessel in the South China Sea, only to pare gains as Federal Reserve officials raised their outlook for interest-rate increases.

The U.S. 10-year yield was little changed at 2.6 percent at 4:40 p.m. in New York, after falling as much as 4.6 basis points. It remains higher for a sixth-straight week, the longest stretch since December 2013.

• “There’s been some discontent between China-U.S. relations ever since Trump was elected -- things have soured quite significantly,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings in New York. That’s an issue because “they’ve been a big buyer of Treasuries for the last 20 years,” he said.
• The Pentagon is demanding China immediately return the drone, which was being recovered by a U.S. Navy ship during routine operations 50 nautical miles northwest of Subic Bay in the Philippines
• Jeffrey Lacker warned that the U.S. central bank may have to raise rates more than three times next year; he’s one of the Fed’s most hawkish policy makers
• St. Louis Fed President and FOMC voting member James Bullard also says he now sees a need for a rate increase in 2017: WSJ
• Treasury yield curve from five to 30 years steepened, extending its rebound from levels near year-to-date lows; spread remains lower on the week by about 15 basis points
• The yield spread between 10-year U.S. notes and similar-maturity Treasury Inflation Protected Securities, or TIPS, falls 11 basis points this week to 1.89 percentage points, the steepest decline in a year
• Market reaction was muted to bigger-than-forecast drop in Nov. housing starts; starts slumped 18.7 percent to a 1.09 million annualized rate in November after a 27.4 percent increase to 1.34 million a month earlier, Commerce Department data showed

To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net, Edward Bolingbroke in New York at ebolingbrok1@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net.