By Sam Goldfarb
A fresh wave of selling swept across government bond markets Wednesday, as investors reacted to solid U.S. economic data and a report suggesting that the European Central Bank could step up lending of its bondholdings.
In recent trading, the yield on the 10-year Treasury note was 2.375%, according to Tradeweb, compared with 2.319% Tuesday.
Yields on European government bonds also moved higher. The 10-year German bond yield rose to 0.255% from 0.231% Tuesday, while the 10-year U.K. bond yield climbed to 1.447% from 1.391%, according to Tradeweb.
Yields rise when bond prices fall.
Wednesday's selling was felt across the Treasury yield curve, with yields on shorter-term and longer-term bonds all rising by substantial amounts. The yield on the 30-year bond, which is especially sensitive to changes in inflation expectations, reached 3.089%, its highest intraday level since early Dec. 2015, before sliding back down to 3.051%.
The 30-year yield is on track to close above 3% for four consecutive days, the longest streak since it Nov. 2015, when it remained above that threshold for 13 days.
The selloff ended a brief respite for the Treasury market, which had traded with a firmer tone in recent days but has generally been under intense pressure since Donald Trump's victory in the Nov. 8 presidential election, as investors respond to the increased chances of fiscal stimulus next year.
Investors have calculated that large tax cuts and increased infrastructure spending could boost growth and inflation as well as increase the supply of government bonds, all of which would erode the value existing government debt.
Most investors and analysts believe that the Federal Reserve will raise interest rates in December for first time since the central bank tightened policy at the end of last year. However, expectations have also been growing that the Fed could tighten policy at a faster pace next year if it looks like expansionary fiscal policies could lead inflation to climb much higher than its 2% annual target.
As they gauge the outlook for monetary policy, investors are also paying close attention to economic data. On Wednesday, a new report showed orders for durable goods rose 4.8% in October, the fastest pace in a year and well above the 2.7% gain predicted by economists surveyed by The Wall Street Journal.
The upward trend in demand for long-lasting manufactured goods supports expectations for faster economic growth in 2017, providing hard evidence for investors to add to their more speculative forecasts for accommodative fiscal policy, analysts said.
Before the release, government bonds had already sold off in Europe after a news report that the ECB could lend out more of its large stockpile of government bonds in an effort to provide more collateral for short-term lending among financial institutions.
Such a move wouldn't mean that the central bank would have to scale back its current bond-buying program. But the report still added to investors' concerns that a larger volume of government bonds could end up in circulation, thereby pushing down bond prices, said Priya Misra, head of global rates strategy at TD Securities in New York.
"People are extremely sensitive to this given that you have the ECB taper risk," she added.
U.S. Treasurys were also weighed down early Wednesday by a $28 billion sale of seven-year notes. Prices ticked up after the auction, which drew strong demand as investorstook advantage of the surging bond yields. The allocation to indirect bidders was unusually large, suggesting robust interest in the auction from foreign investors.
While bond yields remain low by historical standards, their sharp recent rise has inflected pain on investors.
The Treasury bond market has posted a negative 2.52% return -- including bond price gains and interest payments -- this month through Tuesday, according to data from Bloomberg Barclays U.S. Treasury index. For the year, the index has still logged a 1.3% return.
Write to Sam Goldfarb at email@example.com
(END) Dow Jones Newswires
November 23, 2016 13:01 ET (18:01 GMT)
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