By Min Zeng
The U.S. bond market ended the first week of trading in November on a high note, regaining some poise after October's biggest monthly selloff in more than a year.
A main boost this week for haven debt is growing concern over next week's U.S. presidential election, with polls increasingly pointing to a tighter race. The uncertainty is driving many investors to shed risk appetites and preserve capital in relatively safer assets including Treasury bonds and gold.
On Friday, the VIX index, or the fear gauge on Wall Street, reached the strongest level since late June, a sign investors are worried about large price fluctuations in U.S. stocks.
Such haven demand Friday helped the bond market rebound from a brief bout of selling driven by fresh signs of wage inflation. The latest nonfarm jobs report showed the fastest pace of wage gains since June 2009. Inflation is the main threat to long-term bonds.
"The inflation number is being overshadowed by election uncertainty," said Daniel Mulholland, head of U.S. Treasury trading at Crédit Agricole in New York.
The yield on the benchmark 10-year Treasury note fell to 1.783% in late afternoon trading, compared with 1.811% Thursday. Yields fall as bond prices rise.
For the week, the yield fell by 0.06 percentage point, the most on a weekly basis since Sept. 23.
In October, the yield surged by nearly a quarter of a percentage point, driven by improving global manufacturing releases, some uptick in global inflation data and concerns about major central banks' bond purchases reaching limits.Another boost for long-term Treasury bonds: Friday's jobs report's wage inflation data bolstered the case for the Federal Reserve to raise interest rates in December. Investors positioned for this prospect by selling short-term debt and migrating cash into long-term bonds. It is a common asset-allocation strategy for tighter monetary policy as yields on short-term debt are highly sensitive to the central bank's policy outlook.
"The U.S. economy remains pretty healthy and wage pressure reinforces the Fed's plan to raise rates in December," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
Mr. Canavan said next week's U.S. election result remains a wild card, but for now he sticks to his expectation that the Fed would raise rates next month. He expects yields on short-term Treasury debt to rise further from here if the Fed pulls the trigger.
Economists at Goldman Sachs Group Inc placed a 75% probability that the Fed would raise rates in December.
Even as short-term Treasury debt lagged behind long-term bonds Friday, their yields also fell this week driven by haven demand. The two-year note's yield fell by 0.06 percentage point this week to 0.796%, the most on a weekly basis since June.
Next week's election result could muddle the Fed's tightening plan, analysts say.
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 Democratic Party's nominee for president.
Some analysts say a win by Republican candidate Donald Trump would likely send bond yields lower in the short term. In the longer term, they argue, bond yields may rise given his leaning toward fiscal stimulus, which would require more issuance of government bonds for funding, and posing a threat to the value of long-term Treasury debt.
Some others believe that Mr. Trump's idea of trade protectionism may undermine the U.S.'s growth prospects, and this is part of the reason why investors sought safety in Treasury bonds. In a case that the U.S. growth outlook darkens, they say the Fed may need to reverse its tightening campaign and provide monetary stimulus again, a case that would send bond yields lower still.
The 10-year yield has been rising from its record close low of 1.366% made in early July, but it is still very low from a historical standpoint. The yield traded at 2.273% at the end of 2015. It traded at 3% in early 2014.
Write to Min Zeng at firstname.lastname@example.org
(END) Dow Jones Newswires
November 04, 2016 16:20 ET (20:20 GMT)
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