By Min Zeng
U.S. Treasury bond prices sank on Thursday, wrapping up the
biggest two-day selloff in more than a year, as the Federal
Reserve's stance of being patient in raising interest rates cheered
up global stocks.
A round of upbeat global data also sapped demand for haven
bonds. Retail sales in the U.K. rose last month at the fastest pace
in 2014. A gauge of business confidence in Germany improved. The
latest jobless claims in the U.S. dropped last week, a sign of the
labor market gaining traction.
In late-afternoon trading, the yield on the benchmark 10-year
note rose to 2.204% from 2.146% a day earlier.
The yield rose by 0.13 percentage point since the start of
Wednesday, marking the biggest two-day increase since November
2013.
When bond yields rise, their prices fall.
The flight out of Treasury debt suggests investors' sentiment
has improved over the past two days.
Investors had piled into Treasury bonds for safety earlier this
week, sending benchmark bond yields to the lowest level in more
than a year, as market turmoil in Russia and weak manufacturing
releases out of China and Germany had heightened anxiety over the
global economy.
"The fear trade has subsided," said James Combias, head of U.S.
Treasury trading at Mizuho Securities USA Inc. in New York. "Given
bond yields at these low levels, it is not unusual to see haven
demand pull back as risky markets calm down."
U.S. stocks strengthened Thursday, extending Wednesday's gain.
Equity markets in Japan and Europe also rose. Russia's ruble has
rebounded from a record low against the dollar made on Tuesday.
The selling represents a minor setback for the bond market. The
yield on the 10-year note had fallen to 2.07% on Tuesday, the
lowest closing level since May 2013. The yield was 3% at the start
of the year.
Faltering growth overseas, tumbling oil prices, geopolitical
tensions between Russia and Ukraine, and market stress in some
emerging-market countries had boosted demand for Treasury debt
during the course of 2014.
U.S. government bonds offer the highest yield among the bond
markets in the major developed countries, luring buyers seeking
relative value among highly-liquid bonds. A strengthening dollar
this year has boosted foreign investors' returns from U.S.
financial assets.
Treasury securities overall have posted a total return,
reflecting price appreciation and interest payments, of 5.07% this
year through Wednesday, according to Barclays PLC.
Demand for haven bonds started to decline Wednesday as U.S.
stocks rallied following the Fed's interest-rate statement at the
conclusion of its two-day policy meeting.
The Fed said it would be patient in reversing its
zero-interest-rate policy. Fed Chairwoman Janet Yellen said in a
press conference Wednesday following the rate statement that she
expects the U.S. economy to strengthen in the new year, shaking off
concerns over weaker growth overseas and recent market stress in
some emerging-market countries.
"Treasury yields were just far too low on the fear trade anyway,
so they have a lot of catching up to do," which means higher
yields, said David Keeble, global head of interest-rate strategy at
Credit Agricole in New York.
Some traders said the bond market has also been under selling
pressure as comments from Ms. Yellen raised some concerns that the
Fed may raise interest rates sooner than many investors expect,
even though the central bank stressed patience in the rate
statement.
Ms. Yellen said Wednesday that the Fed won't raise interest
rates for at least the "next couple of meetings."
Investors are concerned that a rate increase could come as soon
as the April 2015 policy meeting. That will be sooner than the
second half of 2015, which many investors currently expect. Ms.
Yellen has long been a leading advocate of keeping interest rates
near zero to support the economy.
"The bond market is starting to adjust a bit" to the prospect of
higher interest rates from the Fed in 2015, said Thomas Roth,
executive director in the U.S. government bond trading group at
Mitsubishi UFJ Securities (USA) Inc. in New York.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/2% 2-year 99 24/32 dn 2/32 0.633% +2.0BP
1% 3-year 99 24/32 dn 1/32 1.086% +1.1BP
1 1/2% 5-year 99 8/32 dn 6/32 1.658% +4.1BP
1 7/8% 7-year 99 6/32 dn 12/32 2.001% +5.7BP
2 1/4% 10-year 100 13/32 dn 17/32 2.204% +5.6BP
3% 30-year 103 22/32 dn 1 11/32 2.816% +6.5BP
2-10-Yr Yield Spread: +157.1BPS +153.7BPS
Source: Tradeweb/WSJ Market Data Group
Write to Min Zeng at min.zeng@wsj.com