By Daniel Kruger
The yield on the 10-year U.S. Treasury note approached 3%
Monday, hitting a multiyear high as investors bet that a pickup in
inflation and economic growth would erode the value of government
debt.
The yield on the benchmark 10-year note, which influences
borrowing costs for consumers, corporations and local governments,
rose for a fourth straight session, reaching as high as 2.996% in
early trading before settling at 2.973% -- its highest closing
level since January 8, 2014. The yield was 2.949% Friday. Yields
rise as bond prices fall.
Monday's yield gains came after the National Association of
Realtors said existing home sales climbed 1.1% in March from the
previous month to a seasonally adjusted rate of 5.60 million,
topping the estimates of economists surveyed by The Wall Street
Journal. Signs of economic growth tend to erode the value of bonds
by increasing the appeal of riskier assets.
The 10-year yield has climbed toward 3% this year, lifted by the
Federal Reserve raising interest rates and investors' increasing
confidence in economic growth and the prospects for a tickup in
inflation. It is a climb that stalled out as the yield approached
the milestone in late February, leaving investors wondering if the
latest rise is sustainable.
Investors and analysts have pointed to signs of inflation as one
factor behind the yield's gains, particularly rising prices for
commodities, including oil, and trade tensions with China.
Inflation threatens the value of government bonds by eroding the
purchasing power of their fixed payments and can spur the Fed to
raise interest rates.
Indeed, investors are increasingly betting the Fed has is
preparing to raise interest four times this year, more than the
three that officials initially penciled in at their meetings in
December and March. Fed funds futures, used by investors to place
bets on central bank policy, late Monday suggested a 48%
probability the Fed raises rates three more times this year, up
from 33% a month ago, according to CME Group data.
"It was a confluence of factors that, combined, conspired to
produce a move higher in yields," said Christopher Sullivan, chief
investment officer at United Nations Federal Credit Union. "It's
occurred relatively rapidly."
While rising bond yields can reflect growing confidence in the
economy, that hasn't been apparent in the difference between short
and longer-term rates. As the 10-year yield has climbed, Fed rate
increases have been driving two-year yields higher at an even
faster pace. That has narrowed the gap between the two yields to
about 0.5 percentage point, down from 1.25 percentage points at the
end of 2016.
The so-called yield curve, which measures the spread between
short- and long-term rates, is a key indicator of sentiment about
the prospects for economic growth. Two-year yields tend to rise
along with investors' expectations for tighter Fed interest-rate
policy, while longer-term yields are more responsive to sentiment
about prospects for the economy.
The narrowing gap between the two yields reflects investors'
confidence that the Fed will maintain its current pace of
interest-rate increases despite continuing skepticism that growth
will break out of its postcrisis torpor.
Because short-term rates have exceeded longer-term rates before
each recession since at least 1975 -- a phenomenon known as an
inverted yield curve -- investors become wary as the curve
flattens. Yet the flattening has occurred while economic growth
continues to be steady, and few analysts see signs of any imminent
slowdown.
Some analysts expect higher yields to attract investors back
into bonds. Others have suggested that the climb could accelerate
with increasing confidence in the economic outlook.
While "there's an argument to be made either way," it appears
"there are investors waiting for 3% to buy," said Ian Lyngen, head
of U.S. government bond strategy at BMO Capital Markets.
The low-interest-rate environment in the rest of the world is
likely to slow any rise in U.S. yields, by making U.S. debt more
attractive than bonds from other countries. The 10-year yield on
sovereign debt is 0.633% in Germany, 0.057% in Japan and 1.534% in
the U.K., according to Tradeweb.
"We think it's premature this year for huge moves, because we
still have low rates elsewhere," said Michael Cloherty, head of
interest-rate strategy for RBC Capital Markets.
Investors will get a new read on the U.S. economy Friday when
the Commerce Department releases its initial estimate of economic
growth in the first quarter. Economists surveyed by The Wall Street
Journal are forecasting a 2.1% rise in output, compared with a 2.6%
increase in the last three months of 2017.
While higher yields have the potential to act as a drag on
growth by making it more expensive for consumers and companies to
borrow, investors said they don't yet perceive higher borrowing
costs as a significant economic risk.
The yield's climb to new 2018 highs came ahead of heavy schedule
of government bond auctions. The Treasury plans to sell $113
billion of notes this week, and $116 billion of short-term bills.
The government increased its longer-term note and bond issues by
$42 billion for the months of February through April, and analysts
expected a similar increase for the next three-month period. The
initial note offering is scheduled to be a $32 billion sale of
two-year Treasurys on Tuesday.
The rise in yields to 3% would be "a really big deal," said
Thomas di Galoma, head of Treasury trading at Seaport Global
Holdings. The "general angst about the growing deficits we're going
to see in this country has gotten people turned around" and could
lead to a 3.5% 10-year yield this year, he said.
Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
April 23, 2018 16:50 ET (20:50 GMT)
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