U.S. Government Bonds Pare Losses After Trump Speech
January 20 2017 - 4:26PM
Dow Jones News
By Sam Goldfarb
U.S. government bonds pared earlier losses Friday after Donald
Trump was sworn in as president and struck a populist tone in his
inauguration speech.
Heading into the inauguration, some analysts warned that Mr.
Trump could accelerate a recent bond selloff by speaking in broad
terms about his plans to help the economy through the rollback of
regulations and expansionary fiscal policies. Instead, his remarks
had the opposite effect, dampening the selloff by drawing attention
to his more protectionist views on trade policy, which investors
fear could harm the economy.
"There was a lot of buildup and expectation that if Trump is
going to launch an aggressive push in the first 100 days that there
would be a flavor of that in the address, and there wasn't," said
Jim Vogel, interest-rates strategist at FTN Financial.
"The investment community," he added, "tends to embrace
globalization far more than" Mr. Trump's intended audience.
The market's reaction was still modest. The yield on the 10-year
Treasury note settled at 2.466%, down from 2.500% just before Mr.
Trump's speech, but above its 2.461% close Thursday and its 2.380%
close last Friday.
Yields fall when bond prices rise.
Before the inauguration, bond prices had dropped sharply over
two days as politics took a back seat to comments from Federal
Reserve officials and economic data that suggested the central bank
could raise interest rates at a faster pace than many investors had
expected.
Data released Wednesday showed the consumer-price index
increased 2.1% in December from a year earlier, the largest
year-over-year rise since June 2014. Over time, inflation hits the
value of bond investments by reducing the purchasing power of fixed
principal and interest payments.
Later Wednesday, Fed Chairwoman Janet Yellen signaled interest
rates could be raised "a few times a year" through 2019 and warned
of the negative consequences of tightening monetary policy too
slowly with inflation rising and the labor market near full
employment.
Ms. Yellen's comments helped end a rally that had started in
mid-December, when the 10-year yield reached 2.6%, and which itself
had followed a much larger postelection selloff.
Several policies endorsed by Mr. Trump, including large tax cuts
and increased spending on infrastructure, would likely diminish the
value of outstanding government debt by adding to the supply of
bonds and providing a boost to growth and inflation.
Not all investors are convinced of Mr. Trump's ability to
stimulate growth. Still, some analysts caution the economy is
already strong enough to justify higher bond yields without the
help of fiscal policy.
"Bond markets around the world are making an adjustment to the
reality that growth is looking healthier than previously
estimated," said Anthony Karydakis, chief economic strategist at
Miller Tabak.
Even if fiscal policies fall short of expectations, the bond
market must contend with a healthier economy that is leading to
higher inflation and consistent commentary from Fed officials
pointing to higher interest rates, he said.
There are signs that investors still don't believe that the Fed
will raise rates as quickly as it signaled last December, when it
projected three rate increases during 2017.
Fed-funds futures, which are used to place bets on central bank
policy, showed Friday that investors and traders saw a 71%
likelihood that the Fed will raise rates twice, or half a
percentage point, by its December meeting, but only a 38% chance
that it will raise rates at least three times, according to CME
Group.
The Fed forecast four rate increases for 2016 at their December
2015 meeting, but ended up only raising rates once as inflation
remained muted and it confronted repeated bouts of instability in
the financial markets.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
January 20, 2017 16:11 ET (21:11 GMT)
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