U.S. Treasury Bonds Stabilize
October 28 2016 - 10:04AM
Dow Jones News
By Sam Goldfarb
U.S. government bonds stabilized Friday despite a relatively
strong report on U.S. economic growth, as investors took a breather
following a selloff that has pushed yields to their highest levels
in months in recent days.
Gross domestic product grew at a seasonally adjusted annual rate
of 2.9% in the third quarter, above the 2.5% growth economists
surveyed by The Wall Street Journal had forecast.
Personal-consumption expenditures, however, rose just 2.1% after
gaining 4.3% during the prior period.
In recent trading, the yield on the benchmark 10-year Treasury
note was 1.852%, according to Tradeweb, compared with 1.870% just
before the report and 1.843% Thursday. Yields fall when bond prices
rise.
"It's clear that we're not trading the headline," said Jim
Vogel, interest-rates strategist at FTN Financial. "Instead we're
looking more at personal consumption," which fell below
expectations, he added.
Government bonds across the developed world have sold off
sharply in recent days, pushing bond yields to their highest levels
in nearly five months.
A few developments have been blamed for the selloff, including a
large amount of corporate and government debt issuance and an
encouraging report on the U.K. economy.
But analysts also point to larger factors behind the move that
have been building slowly.
In recent weeks, a few reports in the U.S. and Europe have
pointed to small upticks in inflation. In addition, concerns have
mounted that the ultraloose monetary policies of central banks in
Japan and Europe, including large-scale bond-buying, may have
reached their technical and practical limits. And there has been a
growing chorus of voices calling for more fiscal stimulus from
governments, which could drive up yields by stoking inflation and
increasing the supply of government bonds.
In a sign that the selloff reflects a shift in the economic
outlook, the 10-year break-even rate, or the yield premium
investors demand to hold a 10-year Treasury note relative to the
10-year Treasury inflation protected security, hit 1.73 percentage
point Thursday.
That suggests investors expect a U.S. inflation rate of 1.73% on
average over the next 10 years, up from a low of 1.36% in June.
Inflation chips away at the fixed returns on bonds and is the
main threat to long-term government bonds. It is also a key focus
of central banks, including the Federal Reserve, which targets a 2%
annual inflation rate.
Despite Friday's GDP report and a solid run of monthly jobs
gains, most investors expect the Fed to hold off on raising
interest rates at its next meeting on Nov. 1-2 but then move in
December.
A perennial concern of bond investors is that the Fed could be
too slow to raise rates, allowing inflation to pick up momentum and
forcing the Fed to play catch up by raising rates abruptly. Most,
though, don't see that happening.
At its last reading, the Fed's preferred measure of inflation
had increased 1% from the year-earlier period or 1.7% excluding the
volatile categories of food and energy. In September, Fed officials
signaled that they anticipate two rate increases next year, down
from their previous estimate of three increases.
Even after their recent selloff, bond yields remain at very low
levels. The 10-year Treasury yield has climbed from its record
close low of 1.366% set in July, but it traded at 2.273% at the end
of 2015.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
October 28, 2016 09:49 ET (13:49 GMT)
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