SAM Boston Beer Company Inc

   By Sam Goldfarb 
 

A selloff in European government bonds spilled into the U.S. Treasury market Wednesday, as new bond sales and the potential for tighter central bank policies continued to weigh on haven debt.

In late-afternoon trading, the yield on the benchmark 10-year U.S. Treasury note was 1.790%, compared with 1.758% Tuesday. Yields on European government bonds registered larger increases, with 10-year German bund yield climbing to 0.088% from 0.022% and the 10-year Italian bond yield rising to 1.465% from 1.382%, according to Tradeweb.

Yields rise when bond prices fall.

A heavy dose of corporate and government bond issuance in Europe contributed to the overnight selloff, analysts said.

Investors are also growing more confident that the Federal Reserve will raise interest rates in December but remain uncertain about the future of the European Central Bank's bond-buying program.

ECB President Mario Draghi defended that program Tuesday. But he hasn't explicitly said it will be extended in its current form once it expires in March. That means investors need to prepare for the "tail risk" that the central bank tapers its bond purchases, said Stanley Sun, interest-rates strategist at Nomura Securities International in New York.

After rising sharply at the start of October, government bond yields have stabilized in recent weeks. But the selloff may have a "little bit more room to go just given the sentiment shift in the overseas markets," Mr. Sun said.

Among the reasons why investors think central banks may scale back their stimulus efforts is a growing chorus of voices urging governments to do more to support their economies through expansionary fiscal policies.

Large-scale fiscal stimulus doesn't seem imminent, but there are signs that this argument is starting to get a more receptive hearing in some European capitals.

In the U.S., meanwhile, several Fed officials over the past few days have signaled that the central bank's tightening plan this year remains on track.

Fresh economic data Wednesday showed a decline in the U.S. trade deficit and an increase in retail and wholesale inventories last month, a potentially positive sign for the third-quarter gross-domestic product numbers that will be released Friday.

Fed-funds futures, which are used to place bets on central bank policy, showed Wednesday that investors and traders see a 74% likelihood of a rate increase in December, up from around 60% at the start of the month, according to CME Group.

"People are coming to terms with the reality that there is near unanimity among Fed officials that there is going to be a move in December," said Anthony Karydakis, chief economic strategist at Miller Tabak.

Despite the generally soft appetite for government debt, demand was decent for $34 billion of five-year Treasury notes sold Wednesday. The auction attracted $2.49 in bids for each dollar offered, a higher ratio than three of the past four five-year note auctions.

 
    COUPON  ISSUE   Price     CHANGE   YIELD  CHANGE 
     3/4%   2-year  99 31/32  dn 1/32  0.872%  +1.6BPS 
       1%   3-year  100 5/32  dn 1/32  1.016%  +1.3BPS 
   1 1/8%   5-year  99 14/32  dn 4/32  1.302%  +2.6BPS 
   1 3/8%   7-year  98 21/32  dn 6/32  1.580%  +2.9BPS 

1 1/2% 10-year 97 13/32 dn 9/32 1.790% +3.2BPS

   2 1/4%  30-year   94 1/32  dn 22/32 2.537%  +3.4BPS 

2-10-Yr Yield Spread: +91.8BPS Vs + 90.2BPS

Source: Tradeweb/WSJ Market Data Group

(END) Dow Jones Newswires

October 26, 2016 16:08 ET (20:08 GMT)

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