Yields for long-dated Treasurys rose Tuesday, as appetite for assets perceived as safe receded somewhat, a day after U.S. government debt experienced its biggest rally in weeks, amid worries about the possible collapse of a Chinese property development company and the potential for global financial contagion.
On top of that investors are positioning for a two-day Federal Reserve policy meeting starting later Tuesday.
What Treasury yields are doing
What's driving the market?
U.S. markets were calmer early Tuesday after the biggest rally in Treasurys, which drove yields lower, in about six weeks on Monday.
The flight to safe-haven assets was partly precipitated by fears about the implosion of China property developer Evergrande but on Tuesday, chairman of the company, Hui Ka Yan, said it is dealing with unprecedented difficulties and its employees are facing severe challenges, but vowed to emerge from the crisis.
The challenges for the highly indebted Evergrande comes as China clamps down on the use of excessive leverage by property developers in the country and its problems have amplified concerns about the economic recovery of the world's second-largest economy from the problems stemming from COVID-19.
Meanwhile, financial markets are vulnerable to volatility as they anticipate the outcome of the Federal Reserve meeting this week which could see policy makers announce plans to taper its $120 billion in monthly bond purchases.
Investors will be looking at the Fed's projections for interest rate rises which could also cool buying in Treasurys and push yields higher. For the first time on Wednesday Fed officials will pencil in their outlook for interest rates in 2024.
Investors also are watching developments with the U.S. federal debt ceiling, amid concerns that the government will face a shutdown. The Wall Street Journal reported that Democratic leaders would attach a suspension of the debt limit through December 2022 to a short-term spending bill, which could set up a clash with Republicans over preventing both a partial government shutdown and a potential U.S. debt default. The House is expected to vote on the combined measure this week.
What analysts are saying
"The threat of a government shutdown in the US as Congress has not yet been able to resolve the lingering debt-ceiling issue adds to market participants' list of concerns," wrote analysts at UniCredit in a Tuesday research note.
"After all, UST yields were down yesterday, not up. There is still nothing to indicate emergency sales in the US government bond market like those that were experienced immediately after the coronavirus pandemic hit the markets in March of last year. This could be seen as an indication that the current episode is manageable and that ultimately it will not significantly influence the FOMC's decision," wrote UniCredit.