U.S. Government Bonds Strengthen
November 28 2016 - 4:06PM
Dow Jones News
By Sam Goldfarb
U.S. government bonds strengthened Monday, showing some signs of
positive momentum after three consecutive weeks of yield
increases.
In late-afternoon trading, the yield on the benchmark 10-year
Treasury note was 2.319%, compared with 2.359% Friday. Yields fall
when bond prices rise.
Bonds have sold off sharply since Donald Trump's victory in the
Nov. 8 presidential election, as investors respond to the increased
chances of fiscal stimulus next year.
Investors have calculated that large tax cuts, increased deficit
spending, and the rollback of regulations should boost economic
growth in the coming years, leading to higher inflation and a
faster pace of interest-rate increases by the Federal Reserve.
A flood of new bonds to finance a growing budget deficit would
dilute the value of outstanding government debt. So would higher
inflation and interest rates, while faster growth could lead
investors to sell government debt in favor of riskier assets.
If current projections prove accurate, Mr. Trump's victory could
represent a turning point for bond yields, which reached record
lows earlier this year on concerns that the world was stuck in a
low-growth, low-inflation environment, accompanied by ultraloose
monetary policies from central banks.
Still, some investors and analysts have cautioned that the
selloff may be due for a pause, partly due to the hazards of
predicting government policy even with Republicans controlling
Congress and the White House.
In a sign that buyers might be returning to the market, an
auction of seven-year Treasury notes drew robust demand Wednesday,
after sales of two-year and five-year notes met with soft
receptions earlier in the week. The highlight was 72.7% indirect
bidding, the highest on record, according to Jefferies LLC. The
category is a proxy of demand from foreign investors including both
private investors and foreign central banks.
The yield on the 10-year note reached 2.417% Wednesday morning,
its highest intraday level since July 2015, but declined
immediately following the auction, according to Tradeweb.
As bonds continued to strengthen Monday, pre-auction yields are
looking like "a near-term top," said John Herrmann, rates
strategist at MUFG Securities in New York.
Eventually, though, Mr. Herrmann still expects yields to climb
higher as the economy picks up strength next year.
Apart from the outlook for fiscal policy, economic data released
in November has pointed to a brighter growth outlook and added to
the selling in the bond market.
Among the highlights were the best two-month stretch of retail
sales in at least two years, the fastest pace of housing starts
since 2007, and strong demand for long-lasting manufactured
goods.
Any rally in the bond market this week should be supported by
the typical buying that occurs at the end of each month, as some
investors add government bonds to their portfolios to match the
swelling volume in indexes they track. But it could be tested by
new economic data, including the Fed's preferred measure of
inflation Wednesday and employment numbers Friday.
COUPON ISSUE Price CHANGE YIELD CHANGE
1% 2-year 99 25/32 up 1/32 1.111% -1.2BPS
1% 3-year 98 30/32 up 3/32 1.370% -2.9BPS
1 3/4% 5-year 99 24/32 up 6/32 1.801% -3.6BPS
2 1/8% 7-year 99 31/32 up 10/32 2.132% -4.6BPS
2% 10-year 97 6/32 up 11/32 2.319% -3.9BPS
2 7/8% 30-year 97 29/32 up 16/32 2.982% -2.5BPS
2-10-Yr Yield Spread: +120.8BPS Vs + 123.6BPS
Source: Tradeweb/WSJ Market Data Group
(END) Dow Jones Newswires
November 28, 2016 15:51 ET (20:51 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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