By Min Zeng
The U.S. government bond market was under moderate selling pressure Thursday following price gains in the previous three sessions.
Uncertainty over next week's U.S. presidential election had stoked demand for haven debt. But the bond market pulled back Thursday as selling from the government debt sector in Europe spilled over.
Hurting demand for bonds was the Bank of England's playing down the chances of further monetary stimulus as it raised its inflation forecast for 2017, driven partly by a weaker British pound. Sizable monetary stimulus by major central banks in the developed were a main driver that had sent government-bond yields to historic low levels this past summer. Bond yields have been rising over the past month, driven by worries of less support from central bank. Thursday's BOE news added to that anxiety.
"The Bank of England is the latest culprit" for the bond market, said Anthony Cronin, a Treasury bond trader at Société Générale SA. "They were more hawkish in their meeting and this is causing a selloff in global fixed-income markets."
In addition, a U.K. court ruled Thursday that the government can't trigger negotiations to leave the European Union without a vote from Parliament. The news sapped the allure of haven debt as some analysts say that pro-EU lawmakers will have an opportunity to steer the country toward a "softer" exit, with more ties to the bloc and a more open immigration policy. This scenario would cushion the negative impact of Brexit on the U.K. growth outlook.
In recent trading, the yield on the benchmark 10-year Treasury note was 1.813%, according to Tradeweb, compared with 1.799% Wednesday. Yields rise as bond prices fall.
The bond market pared its price losses after a U.S. report pointed to a setback in the service industry. The monthly index measuring the health of the sector fell to 54.8 last month from 57.1 in September. The employment component also retreated, which flags some caution toward the nonfarm employment report due Friday morning.
Economists expect Friday's release to show the U.S. economy added 173,000 new jobs last month, up from 156,000 a month earlier.
A solid jobs report would bolster the Federal Reserve's case to raise short-term interest rates next month. Higher interest rates tend to shrink the value of outstanding bonds. The Fed said in its latest monetary policy statement Wednesday that the case has strengthened for a rate increase.Still, next week's election result could muddle the Fed's tightening plan, analysts say. Over the past few sessions, trading has become more volatile on the prospect of a tighter race than many had anticipated.
Investors have shed their holdings of riskier bets and embraced haven bonds after news reports last Friday that Federal investigators have launched a new probe into private emails of Hillary Clinton, the Democratice nominee for president.
Wagers that would benefit if Donald Trump, the candidate from the Republican Party, wins are mounting again after a recent pullback. Among the most pronounced moves was the Mexican peso, which has been under renewed selling pressure against the dollar lately.
Some analysts say a Trump win in the short term would likely send bond yields lower, but in the longer term, bond yields may rise given his leaning toward fiscal stimulus, which would require more issuance of government bonds forfunding and post a threat to the value of long-term Treasury debt.
Bond yields have been rising after a big drop during the summer following the U.K.'s referendum to leave the European Union. The 10-year note's yield rose by 0.23 percentage point in October, the biggest monthly increase since June 2015.
Investors' appetites for long-term government debt in the developed world have been diminishing due to improvement in global economic data, rising inflation expectation, concerns about major central banks' bond-buying programs in Japan and Europe reaching a limit and a potential shift into large fiscal stimulus in 2017 that would require rising government debt issuance for funding.
Despite the rise, Treasury yields remain historically very low. The yield traded at 2.273% at the end of 2015. It had been at 3% in early 2014.
Write to Min Zeng at email@example.com
(END) Dow Jones Newswires
November 03, 2016 11:21 ET (15:21 GMT)
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