By Sam Goldfarb
Selling of U.S. government bonds slowed Friday, pushing yields on longer-term bonds modestly higher after two days of sharp increases.
In late afternoon trading, the yield on the benchmark 10-year Treasury note was 2.600%, compared with 2.580% Thursday and 2.462% last Friday. Yields rise when bond prices fall.
Bonds sold off Wednesday afternoon and into Thursday after the Federal Reserve raised interest rates for the second time since 2006 and signaled a slightly faster pace of tightening next year than it had previously anticipated.
Fed officials justified the moves by pointing to an improving U.S. economy. But Fed Chairwoman Janet Yellen acknowledged that the central bank is also monitoring U.S.fiscal policy, which is widely expected to become more expansive next year as President-elect Donald Trump assumes office.
The yield on the 10-year note, which was 2.446% right before Fed's policy announcement, climbed as high as 2.628% Thursday.
Still, there were signs by Thursday that the selling was orderly, reflecting a rational response to the possibility of more rate increases next year rather than "just an outright market collapse," said John Canavan, market analyst at Stone and McCarthy Research Associates.
Bonds now have a chance to make "a little bit of a quiet correction" though any pause in the selloff wouldn't "necessarily tell us anything about where we're at going forward," he added.
After reaching record lows in July, bond yields began to rise in the late summer and early fall in part because of a run of solid economic data and signs inflation might be starting to creep up after years of remaining stubbornly below theFed's 2% target.
Inflation chips away bonds' fixed returns over time and is a big threat to long-term government bonds.
Yields then soared after the Nov. 8 election, reflecting bets that Mr. Trump and a Republican-controlled Congress will increase the budget deficit by cutting taxes and boosting spending on defense and infrastructure.
Adopting expansive fiscal policies could diminish the value of outstanding government debt by adding to the supply of bonds. It could also spur growth and inflation, prompting the Fed to quicken its pace of interest-rate increases.
Not all bonds pulled back Friday. Prices on shorter-term U.S. government bonds were roughly flat, as investors shifted money from long-term bonds to shorter-term debt.
That trade, reflecting expectations for higher growth and inflation, has been broadly popular since the election but had eased in recent days as investors focused more on the prospect of tighter monetary policy, which would tend to have a larger impact on short-term bond yields.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1% 2-year 99 16/32 flat 1.260% -0.2BPS
1 3/8% 3-year 99 12/32 up 1/32 1.595% -0.5BPS
1 3/4% 5-year 98 16/32 flat 2.068% -0.2BPS
2 1/8% 7-year 98 7/32 dn 3/32 2.407% +1.2BPS
2% 10-year 94 25/32 dn 6/32 2.600% +2.1BPS
2 7/8% 30-year 94 dn 27/32 3.188% +4.5BPS
2-10-Yr Yield Spread: +134BPS Vs + 131.9BPS
Source: Tradeweb/WSJ Market Data Group
Write to Sam Goldfarb at email@example.com
(END) Dow Jones Newswires
December 16, 2016 16:03 ET (21:03 GMT)
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