Justin Lederer comments: TREASURIES-U.S. bond yields fall from 4-month peaks

 October 18, 2016, Yahoo!Xtra

* Weaker stock prices renew bids for U.S. government debt * U.S. yield curve flattens from widest level in a month * N.Y. Fed business index falls unexpectedly in October * Fed "very close" to employment, inflation goals -Fischer (Updates market action, adds quote) By Richard Leong NEW YORK, Oct 17 (Reuters) – U.S. Treasury yields declined after hitting four-month highs on Monday, as investors sought bargains in bonds whose prices had dropped on Federal Reserve Chair Janet Yellen’s remarks last week which suggested that the central bank might tolerate higher inflation. 

Losses on Wall Street stocks and a surprise drop in a New York Federal Reserve gauge on regional business activity in October also supported demand for bonds. 

"People see decent value at these levels," said Sharon Stark, fixed-income strategist at Incapital LLC in Boca Raton, Florida. 

U.S. benchmark 10-year Treasury notes rose 8/32 in price for a yield of 1.762 percent, down 3 basis points from Friday. Earlier on Monday the 10-year yield reached 1.814 percent, the highest since June 2, according to Reuters data. 

Wall Street indexes were 0.2 percent lower. 

Yellen said on Friday the question was whether the damage following the financial crisis of 2008-09 could be undone "by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market." Some traders interpreted her remarks as suggesting the central bank might consider allowing inflation to run above the Fed’s 2.0 percent target. They sold more longer-dated Treasuries than short-term ones in reaction to Yellen’s comments, pushing their spreads to their widest in about a month. 

"People are still digesting what Yellen said," said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York. "We hit the lows (in prices) overnight and it’s been a grind from there." The yield spread between five-year and 30-year Treasuries reached 129 basis points earlier Monday before retreating to 126 basis points, which was nearly 1 basis point tighter than Friday. 

The decline in Treasury yields was mitigated by a strong supply of corporate bonds with an expected $25 billion of investment-grade issues to hit this week, according to IFR, a unit of Thomson Reuters. 

While economic data has been mixed, U.S. interest rates futures implied traders saw nearly a 70 percent chance of a rate hike in December, little changed from late Friday, according to CME Group’s FedWatch program. 

On Monday, Fed Vice Chair Stanley Fischer said the central bank was "very close" to its targets on domestic inflation and unemployment. Fischer, however, did not specify the timing of a rate hike. 

Boston Fed President Eric Rosengren told Reuters the current levels of jobs and inflation support the case for a rate increase soon.