By Min Zeng
Selling pressure eased in the U.S. government bond market Friday after the yield on the benchmark 10-year note hit an 11-month high.
The yield on the 10-year note, a bedrock of global finance, had climbed to 2.34% during Asian trading session, the highest since last December. The yield has since pulled back and recently was 2.28%, according to Tradeweb, compared with 2.278% Thursday.
Yields rise as bond prices fall.
Larry Milstein, managing director of government and agency trading at R.W. Pressprich & Co., said the 10-year yield around 2.3% "seem to attract dip buyers," reflecting a view that the sharp rise in bond yields since the U.S. presidential election earlier this month may be overdone.
The 10-year Treasury yield has been upmore than 0.4 percentage point since Donald Trump won the presidential race.
Many investors have been shedding bondholdings and piling into stocks as they believe that large fiscal spending, lower taxes and lighter banking regulations advocated by Mr. Trump will lead to stronger economic growth, higher inflation and a faster pace of interest rate increases by the Federal Reserve. These elements tend to shrink the value of outstanding bonds. Inflation, in particular, is a big threat to long-term government bonds.
Some investors and analysts warn that bond yields still have further room to rise in the months ahead, leaving bondholders vulnerable.
The bond market rout is raising debate whether it marks the start of a reversal from a prolonged cycle of low yields since 1981. After closing at a record low of 1.366% in early July, the 10-year yield has been soaring. Some traders and analysts say the summer low may have marked the rock-bottom level for the yield.
The key rationale, they argue, is that the bond market is on the cusp of a regime shift. For years, low growth, low inflation and ultraloose monetary stimulus have been the key factors driving investors to buy government bonds, sending yields sinking.
Now the narrative is starting to shift the other way, which is higher growth, higher inflation and less accommodative monetary policy support.
Analysts say the reason why bond yields have jumped so much is that before the election data have pointed to an improvement in global manufacturing and an uptick in inflation pressure. This week's solid retail sales, housing starts and labor market releases in the U.S. bolstered optimism over the resilience of the U.S. economy.
Some expect the 10-year yield could rise to 3% in 2017 -- a level last traded in early 2014.
Not everyone is subscribing to the view that the cycle of low yields is over.Some investors point to the uncertainty regarding Mr. Trump's policy. They question how big the fiscal stimulus will be and how much of a boost it could give to the broader economy. In addition, they are concerned about Mr. Trump's trade protectionism stance which may hurt the U.S. growth outlook.
Some analysts reckon the dark side of a sharp rise in yields if they pick up more traction from here. Treasury bond yields are benchmarks to set long-term borrowing costs for consumers and businesses. U.S. mortgage rates have been rising on the back of higher Treasury yields.
Higher Treasury yields also raise the borrowing costs for foreign governments and firms raising capital in U.S. markets. Furthermore, higher U.S. bond yields are boosting the appeal of the U.S. dollar, generating risk of capital flight out of developing countries and threatening to cause chaotic declines in emerging-market bonds and currencies.
The rise in bond yields and the dollar may complicate the Fed's plan in normalizing its interest rate policy.
Fed Chairwoman Janet Yellen reiterated Thursday that an increase in short-term interest rates "could well become appropriate relatively soon."
Analysts say Fed officials may not want to spook the bond market at this point as concerns have been rising over whether the pace of tightening in 2017 may be faster than many investors currently anticipate. If this fear grows, it could rattle the bond market and send yields up further.
"The big question mark is Trump's policy," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. "He says he's pro-growth, but if his protectionist rhetoric turns into policy, then the Fed won't have to tighten."
Write to Min Zeng at firstname.lastname@example.org
(END) Dow Jones Newswires
November 18, 2016 10:55 ET (15:55 GMT)
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