CME CME Group Inc

By Sam Goldfarb

U.S. government bond prices weakened on Wednesday, as a jump in oil prices led investors to favor riskier assets.

The yield on the benchmark 10-year Treasury note settled at 1.852%, compared with 1.783% on Tuesday, marking its largest one-day gain since March 1. Yields rise when bond prices fall.

In recent months, oil prices have been taken as a proxy for the health of the global economy, with stock prices climbing when those of commodities rise and falling when they drop. Investors on Wednesday were seen moving out of bonds and into stocks.

Although Treasurys spent much of the morning treading water, yields jumped in concert with oil prices, outpacing a similar move by the S&P 500 stock index, said Mark Cabana, U.S. rates strategist at Bank of America Merrill Lynch in New York. After failing to rise as much as stock prices earlier in the week, government bonds [yields] are playing "a little bit of catch up," he said.

Before the sudden increase, the yield on the 10-year had barely budged over several days, hovering just below the 1.8% level to which it has hewed closely for more than two months.

Analysts say several factors are keeping U.S. bonds where they are. Subdued inflation, aggressive monetary-stimulus programs overseas and signals from the Federal Reserve that it is no hurry to raise interest rates all make Treasurys look attractive to investors. Yet easing concerns about the global economy, rising equities prices and the occasional warning from Fed officials about complacency are simultaneously bolstering yields.

"Investors were very concerned that the global economy was going into a recession, and we've learned subsequently that the global economy is not crashing," said Andrew Wilkinson, chief market analyst at Interactive Brokers. Still, "there's a very strong message coming from the Fed that interest rates will be lower for longer," he said.

This week, the disconnect between stocks and bonds became stark, as the Dow Jones Industrial Average closed above 18000 for the first time since July, while the 10-year Treasury yield traded at less than 0.4 percentage point from its record closing low, set in the summer of 2012.

A concern for bond buyers is that the diverging course of stocks and bonds could presage a large selloff of Treasurys, which may have been previewed on Wednesday. But history suggests the gap between the two assets may need to get wider before that happens, Mr. Cabana said.

Federal Reserve Bank of Boston President Eric Rosengren said late on Monday that traders and investors are seriously underestimating how many rate rises the U.S. central bank is likely to deliver over the next few years. But fed-fund futures, used by investors and traders to place bets on central bank policy, still show only a 21% likelihood of a rate increase from the Fed at its June 2016 policy meeting, according to data from CME Group.

Corporate bond sales have also picked up recently, as companies take advantage of low yields to lock in favorable funding costs. And Argentina's first bond sale since its default in 2001 drew strong demand, underscoring the appetite from investors for riskier forms of debt.

An influx of corporate and sovereign bonds often leads investors to lighten up on Treasurys, though selling before Wednesday was muffled by buyers taking advantage of cheaper prices, analysts said.

COUPON   ISSUE  Price  CHANGE  YIELD CHANGE 
 
7/8%   2-year  100 4/32  dn 3/32  0.806% +4.8BPS 
 
7/8%   3-year  99 22/32 dn 6/32  0.981% +6.4BPS 
 
1 1/4%   5-year  99 21/32 dn 11/32  1.320% +7.0BPS 
 
1 1/2%   7-year  99 5/32  dn 16/32  1.631% +7.4BPS 
 
1 5/8%   10-year  97 31/32  dn 20/32  1.852% +6.9BPS 
 
2 1/2%   30-year  96 24/32 dn 1 10/32 2.659% +6.5BPS 
 
2-10-Yr Yield Spread: +104.6BPS vs   + 102.5BPS 

Source: Tradeweb/WSJ Market Data Group

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

April 20, 2016 16:33 ET (20:33 GMT)

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