U.S. Government Bonds Hit by New Debt Sales
May 23 2017 - 4:35PM
Dow Jones News
By Min Zeng
A bout of selling hit the U.S. government bond market on
Tuesday, reversing earlier gains following the deadly terrorist
attack in Manchester.
The yield on the benchmark 10-year Treasury note settled at
2.285%, up from 2.254% Monday. Yields rise as bond prices fall. The
yield was still down from 2.446% at the end of 2016.
Traders said new debt sales from both the Treasury and the
private sector chipped away the haven flows in the bond market. The
Treasury on Tuesday auctioned off $26 billion of two-year Treasury
notes, which will be followed by a $34 billion sale of five-year
notes Wednesday and a $28 billion sale of seven-year notes
Thursday.
In addition, corporate bond supply has been robust this week as
the political jitters surrounding the Trump administration that
rattled markets last week have eased, said analysts. Firms and
banks that underwrite new corporate debt typically sell Treasurys
to hedge against unwanted interest-rate swings, reflecting the
Treasury bond market's role as a bedrock for global finance.
"We see a rush of corporate issuance to squeak through the
pre-Memorial day spigot," said Russ Certo, managing director of
rates trading at Brean Capital LLC.
Also driving Treasury yields higher Tuesday afternoon, said some
traders, was a report from Reuters that hearings in the Senate and
House of Representatives on Tuesday showed there is no evidence of
collusion between Trump's presidential campaign and Russia. Reuters
cited a White House spokesman as saying that President Donald Trump
never jeopardized intelligence sources.
The bright side of higher yields: they attracted buyers to the
two-year note auction. Overall demand for the sale reached a
one-year high.
The outcome surprised some traders given the high expectation
that the Federal Reserve will act in a few weeks. U.S. stocks have
rebounded from last Wednesday's big selloff, while the U.S. dollar
has been weakening this year, which gives the Fed some room to
tighten monetary policy.
Some analysts say the auction results suggest some investors are
skeptical whether the Fed would raise rates during the second half
of this year given the uncertainty surrounding fiscal stimulus and
the outlook for the U.S. economic growth and inflation.
"There is skepticism about how much the Fed can actually
tighten," said Mary Ann Hurley, vice president of trading in
Seattle at D.A. Davidson & Co.
The minutes of the Fed's May 2-3 meeting are due Wednesday
afternoon. Investors will zero in on clues about the pace of
interest-rate increases as well as discussions about how to wind
down the a large balance sheet that includes more than $2 trillion
worth of Treasury debt holdings.
Some analysts say the prospect of a slow path in raising rates
reduces the risk of a big rise in Treasury yields, encouraging
buyers into long-term Treasurys, which offer more attractive yields
compared with government bonds in Germany, Japan and the U.K.
The two-year note auction drew 57.2% indirect bidding, a metric
that measures demand from foreign investors. That is higher than
the average of 46.6% for the past six auctions.
Despite the roaring stock and corporate bond markets this year,
Treasury bond yields have fallen after a big rise during late 2016.
In mid-March, it traded above 2.6%.
Bill Northey, chief investment officer at the private client
group of U.S. Bank, said he still expects the 10-year Treasury
yield to rise to somewhere between 2.75% and 3% by the end of this
year.
Mr. Northey said he believes that the soft patch during the
first quarter won't derail U.S. growth momentum. Mr. Northey added
that he doesn't expect a recession to hit the U.S. economy over the
next 18 to 24 months, which supports his case to favor stocks over
bonds.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
May 23, 2017 16:20 ET (20:20 GMT)
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