By Sam Goldfarb
U.S. government yields soared close to their highest levels of the year Wednesday as the postelection bond rout gained new momentum in response to surging oil prices and solid U.S. economic data.
Government bonds across the globe have been under severe pressure since Donald Trump's victory in the Nov. 8 presidential election, as investors respond to the increased chances of fiscal stimulus next year. While the bond rout had taken a pause in recent days, it picked up again overnight as oil prices jumped in anticipation of a deal by the Organization of the Petroleum Exporting Countries to curb oil production that was reached later inthe morning, according to people familiar with the matter.
Rising oil prices usually sap demand for government debt by increasing investors' appetite for riskier assets such as stocks and by lifting inflation expectations.
In recent trading, the yield on the benchmark 10-year Treasury note was 2.392%, according to Tradeweb, compared with 2.305% Tuesday. The yield's intraday high this year was reached last Wednesday at 2.417%, according to Tradeweb. Its highest close of 2016 was 2.359%, set Friday.
Yields rise when bond prices fall.
Adding to the selling pressure Wednesday was a report on private sector payrolls that came in much better than analysts had expected and another release that showed decent gains in Americans' incomes and household spending.
The reports buttressed a growing conviction among investors that the U.S. economy is on solid footing even without the help of the tax cuts and infrastructure spending that is now widely anticipated thanks to Mr. Trump's victory.
In general, faster economic growth should lead to higher inflation, which in turn could lead to a faster pace of interest-rate increases by the Federal Reserve, investors and analyst say.
Because low oil prices have helped keep a lid on inflation over the past couple of years, a reversal in that market would create even more momentum behind rising bond yields.
"You are in an environment which overall makes the Treasury market vulnerable," said Anthony Karydakis, chief economic strategist at Miller Tabak. Investors are already geared for higher growth and inflation, so bond prices are poised to decline when those views are confirmed by new developments, he added.
One possible source of demand for bonds Wednesday would be the typical buying that occurs at the end of each month as newly minted bonds replace maturing debt in bond indexes and fund managers who track those indexes adjust their portfolios accordingly.
But some investors already made that trade Tuesday to avoid potential prices swings on the final day of the month.
Support for bonds was also weakened by comments from Mr. Trump's pick for Treasury secretary, Steven Mnuchin, analysts said.
In an interview with CNBC, Mr. Mnuchin confirmed that changes to the tax code were a priority for the incoming administration. He also said the government should consider issuing bonds with maturities beyond the current maximum of 30 years to lock in low borrowing costs.
If issued, such bonds would likely soak up some of the demand that currently exists for other long-term bonds, analysts said.
This month's selloff in Treasury debt has had a large impact on other parts of U.S. fixed-income markets, raising costs for a swath of borrowers.
The average rate on a 30-year fixed conforming mortgage was 4.10% Tuesday, up from 3.62% on Election Day, according to MortgageNewsDaily.com. The average investment-grade corporate bond yield climbed to 3.33% Tuesday from 3.0%, while the average municipal bond yield jumped to 2.68% from 1.99%, according to Bloomberg Barclays data.
Though they have risen from record lows set earlier this year, government bond yields are still low by historical standards -- a result of years of subpar growth, tepid inflation and ultraloose monetary policies from major central banks.
Some investors and analysts caution that the latest bond selloff may be overdone, considering the difficulties in predicting government policy and its impact on the economy. On several occasions in recent years, bond yields have registered increases only to settle back down again, as faster growth or much tighter monetary policy failed to materialize as expected.
In the "taper tantrum" episode 2013, the 10-year yield climbed from around 1.6% at the start of May to 3% by early September. But the yield fell steadily in 2014 to just above 2% by the end of that year.
Write to Sam Goldfarb at firstname.lastname@example.org
(END) Dow Jones Newswires
November 30, 2016 13:37 ET (18:37 GMT)
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