Yields steady after Rosenstein drama, ahead of Fed

By Kate Duguid

NEW YORK, Sept 24 (Reuters) – U.S. Treasury yields across maturities were steady on Monday afternoon having mostly recovered from early losses on a flurry of conflicting reports about whether Deputy Attorney General Rod Rosenstein, who is overseeing a Justice Department probe into Russia’s role in the 2016 election, would leave his post.

Yields initially fell 2 basis points after news site Axios reported Rosenstein had verbally resigned to White House Chief of Staff John Kelly, in anticipation of being fired by President Donald Trump over a New York Times article which said the deputy attorney general had suggested secretly recording the president in 2017. Rosenstein will meet with Trump on Thursday to discuss his future, the White House announced later Monday morning.

The benchmark government bond was last at 3.078 percent, more than a basis point higher than the session low hit following the Axios report. It remained around 2 basis points below its open, however.

While yields at the short end of the curve only ticked up modestly, the 30-year bond yield was up from its open, last at 3.210 percent.

“In some sense, Trump is very good for the economy and markets. If he were to appoint someone to replace Rosenstein and that were to weaken the teeth of the Mueller investigation, you would think that would clear the way for more pragmatism on the economy and less distraction,” said Tom Simons, money market economist at Jefferies & Co.

Simons said he expected the move to reverse fully.

Beyond the White House, investors this week will be focused on the Federal Reserve policymaking meeting on Tuesday and Wednesday, at which the Fed is expected to raise rates. With the hike almost fully priced in, investors will be watching for clues about the pace of hikes in 2019.

“The key factors for yields this week are the anticipation of what the Fed is going to say about the economy and whether they’re going to do any foreshadowing of rates down the road,” said Lou Brien, market strategist at DRW Trading.

A rise in U.S. average hourly earnings in monthly nonfarm payrolls reports for July and August has backed the view that inflation is picking up, justifying the Fed’s continued tightening.

The Treasury Department on Monday auctioned off $37 billion of two-year notes to weak demand, despite selling at the highest yield since June 2008. The high yield was 2.829 percent, reflecting expectations of a Fed rate hike.

The ratio of bids to the amount of two-year debt offered – a measure of overall demand – was 2.44, last hit in December 2016, and the lowest since December 2008. (Reporting by Kate Duguid; Editing by Bernadette Baum and Chizu Nomiyama)