By Sam Goldfarb
A continued slide in U.S. government bond prices pushed the
yield on the 10-year Treasury note above 2.6% Thursday to its
highest level in more than three years, a fresh milestone spurred
by investors' growing confidence in the global economy.
Yields, which rise when bond prices fall, have climbed steadily
this year after being held in check for much of 2017 by a variety
of factors, including soft inflation.
While stocks have set record after record, the recent rise in
Treasury yields has been one of this year's most-notable
developments in the financial markets, signaling a potential shift
in perspective among investors after years of assuming that a
slow-growth, low inflation environment was destined to remain in
place for the foreseeable future. Tepid economic growth and muted
inflation tend to be good for Treasurys because inflation erodes
the fixed payments of government bonds.
Even as they have reflected investors' pessimism, low Treasury
yields have also offered support for the economy, reducing
borrowing costs for businesses and consumers. They've also helped
boost stocks by making them look more attractive to yield-seeking
investors while spurring record bond issuance by U.S. companies. A
sustained rise in yields could eventually dent growth and drag down
share prices.
Selling in the bond market in recent days has been particularly
noteworthy because it has happened as Congress has moved closer to
a government shutdown, a development that might normally be
expected to drive investors from riskier assets to the relative
safety of Treasurys.
Treasurys have come under pressure because "inflation is picking
up a little bit domestically, global growth is rising, central
banks are removing liquidity" and recently-passed tax legislation
is causing U.S. companies to repatriate foreign earnings, said
Daniel Mulholland, head of U.S. Treasury trading at Crédit
Agricole.
As for the threat of a government shutdown, "the market's
finally gotten the joke, since we've been in this situation several
times in the past," said Thomas Simons, senior vice president and
money-market economist in the Fixed Income Group at Jefferies LLC.
If the government does shut down, it would be more of an annoyance
than anything "meaningful for economic activity," he added.
The yield on the benchmark 10-year Treasury note settled at
2.611% Thursday, its highest close since Sept., 2014, compared with
2.579% Wednesday. Its previous 52-week closing high of 2.609% was
set last March.
Several analysts said that one factor weighing on bond prices
Thursday was a report that China's economy expanded at a rate of
6.9% last year. That was higher than markets expected and the
country's first growth acceleration in seven years.
It was also the latest in a run of encouraging economic news
that has helped change investors' outlook. In Japan, long-moribund
inflation has shown signs of life, with the core consumer-price
index rising 0.9% in November from a year earlier, up from 0.1% at
the start of the year. In Europe, data released last week showed
Germany's economy grew 2.2% last year, its fastest pace in six
years.
Improving economic conditions in Japan and Europe matter for
U.S. investors because it increases the chances central banks in
those regions will move more quickly to end postcrisis stimulus
policies that have played a large role in dragging down bond yields
globally.
Minutes from the European Central Bank's December meeting,
released last week, hinted at a relatively near-term end to the
bank's massive bond-buying program, revealing officials "widely"
agreed that the bank needed to change its guidance to investors
early this year to better reflect the state of the eurozone
economy.
Meanwhile, U.S. consumer price-index data released Friday showed
a larger-than-expected jump in critical areas, reinforcing
investors' expectations for rising inflation.
Given synchronized global growth and the impact of
recently-passed tax cuts, "we think we're going to see wage growth
finally, and to the extent we have wage growth, that will put some
upward pressure on inflation numbers," said Jim Brilliant,
portfolio manager Century Management Investment Advisors.
Concerns about rising inflation were illustrated Thursday when
an auction of 10-year Treasury inflation-protected securities, or
TIPS, drew unexpectedly large demand. That helped boost a
market-based indicator of annual inflation expectations over the
next 10 years to 2.082% on Thursday afternoon, up from 2.049%
Wednesday, according to Tradeweb.
Rising inflation expectations have boosted expectations for Fed
interest-rate increases, delivering a particularly heavy blow to
shorter-term Treasurys. Federal-funds futures, used by investors to
place bets on the Fed's rate-policy outlook, showed late Thursday a
56% chance that the Fed will raise rates at least three-times this
year, up from 32% a month ago, according to CME Group data.
The 10-year yield is still quite low by historical standards,
and some analysts don't anticipate much further selling in the bond
market. Despite the recent uptick in consumer prices, some
important inflation gauges remain below the Fed's 2% annual target.
U.S. government bond yields are also much higher than those in most
of Europe and Japan, and rising yields inevitably attract buyers
both at home and abroad.
To get to a 10-year yield above 3%, "you have to have inflation
expectations in the 2.25%-2.5% range," said Gemma Wright-Casparius,
a senior portfolio manager who manages inflation-indexed Treasurys
at Vanguard Group. She said she expects the 10-year yield stay
below 2.65% until additional information confirms that there really
is a pickup in consumer prices.
Indicating the continued appetite for U.S. fixed-income assets,
a broad category of U.S. taxable bond funds experienced a net
inflow of $10.4 billion in the week ended Jan. 10, the largest
weekly inflow since Feb. 2015, according to Thomson Reuters
Lipper.
--
Daniel Kruger
contributed to this article.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
January 18, 2018 16:11 ET (21:11 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.