U.S. Government Bonds Sell Off Ahead of Trump's Updates on Tax Plan
April 25 2017 - 4:10PM
Dow Jones News
By Min Zeng
A broad wave of selling swept the U.S. government bond market on
Tuesday as the Nasdaq Composite Index reached 6000 for the first
time.
The yield on the benchmark 10-year Treasury note settled at
2.330%, compared with 2.275% Monday. Yields rise as bond prices
fall.
The two-day stock rally and price slump in haven bonds offer
some tentative signs that the Trump trade regained some poise after
a recent pullback. Buying stocks and selling Treasurys have been
the popular ways for investors to bet that large fiscal stimulus
would lead to stronger economic growth and higher inflation. The
10-year yield traded above 2.6% in mid-March and fell to a
five-month low of 2.177% one week earlier.
President Donald Trump is scheduled to offer some updates on his
tax plan on Wednesday. The Wall Street Journal reported Tuesday
afternoon that Mr. Trump is planning to unveil a proposal to slash
the top tax rate on so-called pass-through businesses, including
many owner-operated companies, to 15% from 39.6%.
"Optimism expressed in the stock market about corporate earnings
and tomorrow's tax announcement is finally taking a toll on
Treasury bond prices," said Jim Vogel, market strategist at FTN
Financial.
Mr. Vogel cautions that any disappointment Wednesday could hurt
risk appetites and stoke demand for Treasury bonds again.
Risk appetite has improved following Sunday's first round of
French presidential elections. A mainstream candidate advanced as
expected by many investors, reducing worries over a potential exit
by France from the eurozone. This factor continued to boost
sentiment Tuesday.
Also hurting bonds: Concerns over a shutdown of the U.S. federal
government also have dialed back after Mr. Trump signaled
willingness to wait longer to secure funding on his call for a
border wall. Congress needs to pass a resolution this Friday when
funding for the federal government is set to expire.
In addition, new debt sales contributed to higher bond yields
Tuesday. The Treasury sold $26 billion of two-year notes Tuesday
and is scheduled to sell $34 billion of five-year notes Wednesday
and $28 billion of seven-year notes Thursday.
Selling in the bond market made the two-year sale attractive to
buyers. A gauge of foreign demand rose to the highest since
2009.
U.S. Treasury bonds continue to offer more attractive yields
than their peers in Germany, Japan and the U.K. in a still very
low-yield world.
Some traders say the 10-year Treasury yield is unlikely to
revisit 2.6% any time soon given the uncertainty surrounding the
fiscal policy and economic growth outlook.
U.S. economic data have flagged some caution over the growth
momentum. Tuesday, new home sales rose by 5.8%, a sign of a robust
housing market. But a monthly gauge of consumer confidence fell to
120.3 from 124.9 in March.
Economists polled by The Wall Street Journal expect the U.S.
government to report Friday that the U.S. economy grew at 1% during
the first quarter of the year, down from 2.1% during the last
quarter of 2016.
Another focus for bond investors this week is the European
Central Bank's policy meeting Thursday. Some analysts say reduced
political risk in France may allow the ECB to reduce monetary
stimulus earlier than many investors expect, especially with data
out of the eurozone showing improvement. This may drive investors
to sell eurozone government bonds such as German bunds and the
selling pressure could ripple into Treasury debt, traders say.
Government bond yields in France, Italy, Spain and Portugal fell
Monday after the election results, but they rose along with
government bond yields in Germany. The broad rise was driven by
concerns over the ECB outlook, according to some traders.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
April 25, 2017 15:55 ET (19:55 GMT)
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