By Min Zeng
Selling in the U.S. government bond market eased after the Thanksgiving break.
After climbing above 2.4% earlier in the session, the yield on the benchmark 10-year Treasury note was 2.361% in recent trading, according to Tradeweb. The yield was 2.355% Wednesday, the highest close since July 2015. Yields rise as bond prices fall.
The 30-year bond was the best performer, with its yield sliding to 3.014% recently from a session high of 3.064% and 3.022% on Wednesday.
Some investors deem the bond-market rout since the U.S. election day on Nov. 8 as overdone and say the big rise in yields presents a buying opportunity. The 10-year note's yield has soared from 1.867% on Election Day, logging one of the fastest paces of increases since the 2008 financial crisis.
The prospect of expansive fiscal and economic policy from the new U.S. administration raises market expectation of higher economic growth, higher inflation and a faster pace of interest-rate increases by the Federal Reserve. These factors tend to shrink the value of outstanding bonds. Inflation, in particular, chips away the fixed returns investors get from holding long-term bonds.
Traders say higher yields are a boon for pension funds and insurance firms, which have been struggling to obtain income in a low-yield world. These institutional investors need high-grade long-term fixed-income assets to match their long-term obligations.
"There is no question the pension funds have been starved for yield and the 3% yield level on the 30-year bond is attracting some attention which have had cash buildingin the hopes that higher yields would be forthcoming," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
The Treasury bond market will close at 2 p.m. Friday. Jim Vogel, market strategist at FTN Financial, said trading volume was 40%-50% below average, which may exaggerate bond-price moves.
The 10-year Treasury yield rose above 2.4% during Wednesday and Friday's sessions but fresh buying sent the yield below the mark again. Some analysts say this pattern, if persists, is likely to keep a lid on the yield's ascent.
A $28 billion sale of seven-year Treasury notes on Wednesday drew the strongest overall demand since Feb 2014. The highlight was 72.7% indirect bidding, the highest on record, according to Jefferies LLC. The category is a proxy of demand from foreign investors including both private investors and foreign central banks.
But others caution that the yield still has room to rise.
While it remains to be seen how large the U.S. fiscal stimulus will be in the new year and its efficacy on the economy, data released in November pointed to a brighter growth outlook and added to the selling in the bond market.
Among the highlights: the best two-month stretch of retail sales in at least two years, the fastest pace of housing starts since 2007, wage growth last month rose at the fastest pace since 2009, and demand for long-lasting manufactured goods rose in October at the fastest pace in a year.
The taper tantrum episode serves as a warning for bondholders. The 10-year yield soared from around 1.6% at the start of May 2013 to 3% in early September, driven by fears over a cut in the Fed's bond-buying program. The yield pulled back to 2.5% in October but renewed its climbing into year-end, settling slightly above 3% at the end of December 2013.
Scott Buchta, head of fixed-income strategy at BreanCapital LLC, said he would not be surprised to see the 10-year yield rise to 2.50%-2.60%. Some say they wouldn't rule out that the yield could rise to 3% in coming months.
The key trade over the past few weeks has been selling Treasury bonds and buying stocks, which is termed by traders as the reflation trade. The allocation has been sending U.S. stocks to a record-setting streak this week as investors pulled out of cash from bond funds into equity funds.
Investors had piled into bond funds after the financial crisis, as a prolonged period of soft growth, low inflation and ultraloose monetary policy had sent government-bond yields in the developed world to historically low levels earlier this year.
Some analysts say that if the flow out of bond funds and into stocks picks up momentum, it would send bond yields higher still.
Expectation has been growing that the Fed would raise rates next month and potentially tighten policy at a faster pace than many investors anticipate. This factor has been hurting demand for short-term Treasury debt lately whose yields are highly sensitive to the Fed's policy outlook.
The yield on the two-year Treasury note was 1.143% Friday. It was 1.135% Wednesday, the highest close since April 2010.
Write to Min Zeng at firstname.lastname@example.org
(END) Dow Jones Newswires
November 25, 2016 11:00 ET (16:00 GMT)
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