By Min Zeng
A surge in a gauge of U.S. housing activities on Tuesday
brightened the economic outlook and pushed down prices of ultrasafe
Treasury bonds.
Fresh corporate bond sales added to selling pressure in
Treasurys, extending the market's price loss into a second
consecutive session.
In late-afternoon trading, the yield on the benchmark 10-year
note was 2.262%, compared with 2.228% on Monday. Bond prices fall
as their yields rise.
Government debt in the U.S. had strengthened earlier, along with
a broad rally in European government bonds. A senior European
Central Bank official said the central bank would ramp up bond
purchases this month and next to cope with thinner liquidity during
the summer time.
The comments from ECB board member Benoît Coeuré reminded
investors that the central bank remains a big buyer in the bond
market, which may keep a lid on the rise in bond yields that had
jumped sharply from record lows over the past few weeks.
In the U.S., housing starts jumped by 20.2% in April, the
biggest percentage increase last month since February 1991 and a
positive sign for the housing market.
A number of reports earlier this month, such as retail sales and
industrial production, had been disappointing, which raised some
question about how robustly the U.S. economy is rebounding after a
soft patch in the first quarter.
The health of the economy is the key to the decision about when
the Fed raises short-term interest rates for the first time since
2006. A rise in the Fed's policy rate would shrink the value of
outstanding bonds.
Many investors expect the Fed to wait until very late this year
to tighten policy or possibly stand pat until early 2016. But some
traders say the Fed could raise rates sooner than investors expect
if growth momentum gains traction.
"If the data begins to turn up, it would put the Fed in play for
September," which would send bond yields higher, said Thomas Roth,
executive director in the U.S. government bond trading group at
Mitsubishi UFJ Securities (USA) Inc. in New York.
The Fed is scheduled on Wednesday to release minutes of its
policy meeting in April.
Fed-funds futures, used by investors and traders to place bets
on central bank policy, on Tuesday showed investors and traders see
a 24% likelihood of a rate increase at the September meeting,
according to data from the CME Group. Those odds were 20% a day
ago. The odds of a rate increase for the December meeting were 58%,
compared with 52% a day ago.
Government bonds on both sides of the Atlantic have taken a
beating over the past few weeks, after a strong run-up in prices.
Growing concern about lofty valuations has caused a rush out of
bonds. The ECB's bond-buying program had sent eurozone bond yields
to record lows last month.
Many investors see the move as a buying opportunity, as they
don't expect bond yields to rise significantly given the still
uncertain growth outlook and subdued inflation. Buyers have stepped
into the Treasury debt market, pushing down the 10-year Treasury
yield after it hit 2.366% on May 12, the highest level since Nov.
14.
ECB's Mr. Coeure expressed some concern about the speed of the
bond-market selloff over the past few weeks.
On Tuesday, the yield on the 10-year German government bond fell
to 0.617% from 0.651% Monday. The yield closed at a record low of
0.073% on April 20.
Write to Min Zeng at min.zeng@wsj.com
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