By Min Zeng
U.S. government bonds edged higher Wednesday as lower stocks and a disappointing housing report stoked demand for haven debt.
In recent trading, the yield on the benchmark 10-year Treasury note was 2.552%, according to Tradeweb, compared with 2.563% Tuesday. Yields fall as bond prices rise.
The Dow Jones Industrial Average stock index was recently down 0.1%, stalling its march toward 20,000, a level it has never crossed.
The National Association of Realtors said Wednesday that its pending home sales index, which tracks contracts signed for purchases of existing homes, fell 2.5% from October. Economists surveyed by TheWall Street Journal had expected a 0.5% rise in November.
New debt sales keep the bond market's strength in check.
A $13 billion sale of two-year floating-rate notes is scheduled at 11:30 a.m. Wednesday, followed by a $34 billion auction of five-year notes at 1 p.m. A $28 billion sale of seven-year notes is also due Thursday, which will be the final leg of this year's Treasury debt offerings.
Tuesday's two-year note auction drew the weakest demand since 2008, reflecting diminished appetites for short-term debt as the Federal Reserve earlier this month projected three rate increases during 2017. Yields on short-term Treasury debt are highly sensitive to the Fed's policy outlook.
Trading is thinner than normal due to the holiday season, which contributed to the soft auction demand, say analysts. Some investors, they say, stay on the sidelines and wait for the new year to make fresh investment decisions.
Government bond yields in the developed world have been rising after falling to their historic lows in the summer. The 10-year Treasury yield is up more than 1 percentage point from its record low set in early July. The yield was headed for a second consecutive year of gains, up from 2.273% at the end of 2015.
The shift toward higher yields reflects rising expectations among investors of a brighter growth outlook, higher inflation and potentially a faster pace of interest-rate increases by the Fed. Selling in the bond market had intensified after the U.S. election in early November. The prospect of expansive fiscal policy from President-elect Donald Trump in the coming year has added to expectations of stronger economic growth and higher inflation.
The Treasury bond market overall has handed investors a total return of 0.35% this year through Tuesday, according to Bloomberg Barclays bond indexes data. The sector had logged a 6.2% return between the end of last year and July 8, when the 10-year yield closed at a record-low yield of 1.366%.
Long-term bonds suffered even more. Treasury debt maturing in 10 years or more posted a negative 0.27% return this year through Tuesday, after posting a 19% return through July 8. Total return includes bond price changes and interest payments.
The selling pressure eased last week, with the 10-year yield posting the first weekly decline in seven weeks. Some analysts say the selloff is overdone and that the 10-year yield around 2.6% attracts some buying interest.
The bond market may benefit from the prospect of pension funds rebalancing their portfolios following strong gains in stocks and the selloff in bonds since the U.S. election, said some analysts.
Boris Rjavinski, senior fixed income strategist at Wells Fargo Securities, said he expects "significant pension rebalancing flows going into quarter-end." The bank's model estimates that U.S. defined benefit pension funds will need to add about $20 billion in bonds versus roughly $32 billion outflows from domestic equities, he said.
Write to Min Zeng at firstname.lastname@example.org
(END) Dow Jones Newswires
December 28, 2016 11:01 ET (16:01 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.