U.S. Government bonds open on weak note in 2017, trend likely to continue on Fed rate hike optimism

The U.S. Treasuries started 2017 on a weaker note Tuesday as investors moved away from safe-haven buying on expectations of three rate hikes from the Federal Reserve.

The yield on the benchmark 10-year Treasury note rose 6-1/2 basis points to 2.49 percent, the super-long 30-year bond yield also jumped 6-1/2 basis points to 3.11 percent and the yield on short-term 2-year note bounced 2-1/2 basis points to 1.22 percent by 12 GMT.

We expect Treasuries will continue to drift lower in the coming weeks as markets look to assess the relative strength of data as we move into 2017, something that could yield a slightly more aggressive Fed than was laid-out by the updated FOMC forecasts in December (already looking for 75 basis points of tightening over the course of the year).

Initial jobless claims in the United States declined modestly during the latest week ended December 24, cementing hopes of a further interest rate hike by the Federal Reserve. Also, Fed Chair Janet Yellen’s hawkish tone at the latest Dec 14 monetary policy meeting will get a boost following this data.

The U.S. initial jobless claims declined to 265,000 in the latest week ending December 24th from 275,000 previously and lower than market expectations of 277,000, data released by the U.S. Department of Labor showed Thursday.

Also, the goods trade deficit in the United States slightly widened during the month of November, deeper than what markets had initially anticipated. Sluggishness in imports of capital and consumer goods remains a concern, given their importance in informing the strength of both business investment spending and private consumption.

The U.S. November advance trade in goods report showed a modest widening in the deficit to $65.3 billion on the month, versus $61.9 billion in October. The widening is more pronounced when viewed against August ($59.0 billion) and September ($56.0 billion) data, figures released by the Bureau of Economic Analysis showed Thursday.

Lastly, investors will remain keen to focus on the upcoming economic data and events, highlighted by ISM manufacturing new orders index, FOMC December meeting minutes, ADP nonfarm employment change, initial jobless claims, Markit composite PMI, ISM non-manufacturing employment, service PMI and employment data on Friday.

Also, markets will look ahead to FOMC Member Jerome Powell and Neel Kashkari speech over the weekends.

Meanwhile, the S&P 500 Futures traded 18.25 points higher at 2,254.5 by 12:10 GMT. While at 12:00 GMT, the FxWirePro's Hourly Dollar Strength Index stood neutral at -2.54 (lower than -75 represents a bearish trend).