By Christopher Whittall
Longer-dated U.S. Treasury bonds reversed earlier gains to sell off in choppy trading Wednesday, as bets on a Donald Trump administration boosting fiscal spending overrode initial investor concerns over his surprise victory.
The yield on the 30-year Treasury note rose from Tuesday's close of 2.630% to 2.775% recently, on course to end the day at its highest level since early February, according to Tradeweb. Yields rise as prices fall.
The yield on the benchmark 10-year Treasury rose to 1.956%, on track for its highest close since March. The yield fell aslow as 1.719% in overnight trading from Tuesday's close of 1.867%.
Investors in search of haven assets had piled into government bonds earlier in the day as Mr. Trump looked set to win the White House. Uncertainty over the impact of his policy agenda, including his proposed crackdown on global trade and immigration that some analysts fear could hurt growth, had spooked many investors and sent U.S. stock futures sharply lower.
But bond fund managers soon moved past these concerns to focus on the potential effects of Mr. Trump's economic policies. The president-elect has promised a big boost in spending on defense and infrastructure, while also pledging to cut taxes steeply--a plan that many analysts believe would expand budget deficits.
That implies a rise in government borrowing, increasing the supply of Treasury bonds and potentially boosting inflation, which hurts long-dated debt.
Investors are digesting "the fiscal implications of what a Trump presidency might mean," said Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management.
Jim Leaviss, head of retail fixed interest at M&G Investments in London, said government borrowing is likely to rise in the medium term following Mr. Trump's election.
"We know very little about Trump's economic policies, but a fiscal stimulus through tax cuts and infrastructure spending seems likely," he said.
Expectations of greater fiscal stimulus have been one of several drivers pushing global bond yields higher in recent weeks. Long-dated Treasury yields have climbed more than half a percentage point since hitting record lows in July.
That came as both U.S. presidential candidates had signaled they were willing to increase government spending during the election campaign.
Some European countries have eased the austerity measures that defined their response to the continent's yearslong debt crisis. And the International Monetary Fund, once a proponent of budget cuts, now urges governments to spend more.
Hopes for greater fiscal stimulus helped fuel a sharp selloff in U.K. government debt in October. The yield on the 10-year U.K. government bond was up slightly at 1.268% Wednesday, while 30-year gilt yields also climbed as the move higher in Treasury yields spilled over the Atlantic.
Moves in German bonds, where the government isn't expected to relax its fiscal policy, were more muted Wednesday, with 10-year yields edging lower. Southern European debt, meanwhile, sold off as riskier assets were hit.
Wednesday's moves in the bond market steepened the U.S. yield curve, which often happens when expectations of government borrowing rise.
Even as longer-dated bonds sold off, two-year Treasury yields--which are particularly sensitive to changes in monetary policy--fell slightly as investors bet on a reducedlikelihood of the Federal Reserve raising interest rates in December. The yield on the two-year note was 0.832% recently, up from a low of around 0.712% reached early in the European morning, but down from Tuesday's close of 0.862%.
A sharp selloff in global financial markets could reduce the odds of a Fed rate increase, some analysts say.
Investors will be watching carefully for clues on how likely it is that Mr. Trump will push through increased fiscal stimulus.
The Republican party won both houses of Congress, but it is still unclear whether Mr. Trump can persuade fiscally-conservative house Republicans to support his plans.
"The fault line between him and Congress is that they're fiscally conservative--his instincts are Reaganite in that deficits don't matter, " said Eric Lonergan, a fund manager at M&G Investments.
Matthias Hoppe, a portfolio manager at Franklin Templeton Investments, said the bond market could get pulled in different directions if Mr. Trump manages to implement the policies he promoted during the election campaign.
A drop in U.S. trade would likely act as a drag on U.S. growth, he said, and should keep Treasury yields depressed. On the other hand, fiscal stimulus and increased government borrowing could send yields higher.
"It's difficult to assess which of the effects is going to take place first," said Mr. Hoppe.
Mike Bird contributed to this article.
Write to Christopher Whittall at firstname.lastname@example.org
(END) Dow Jones Newswires
November 09, 2016 09:13 ET (14:13 GMT)
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