By Sam Goldfarb
U.S. government bond extended price declines Wednesday, pushing the yield on the 10-year Treasury note to its highest close of the year, as investors' growing risk appetite sapped demand for haven debt.
Though not the main focus on a day when the Dow Jones Industrial Average surpassed 20000 for the first time in history, the bond market told a similar story, responding to renewed optimism in the U.S. economy following a run of solid economic data and a few early signals that President Donald Trump will try to make good on his promises to cut taxes and roll back regulations.
As investors buy stocks, they often lighten up on theirholdings of safer assets, including government debt. Faster growth can also spur higher inflation, which chips away at the fixed returns of bonds and can lead the Federal Reserve to tighten monetary policy, further hurting bond prices.
The yield on the benchmark 10-year Treasury note settled Wednesday at 2.523%, up from 2.471% Tuesday and its highest close since Dec. 27.
Yields rise when bond prices fall.
"Risk-on behavior is pushing up yields," said Michael Cloherty, head of U.S. interest-rates strategy at RBC Capital Markets. A strong economy, combined with the prospect of expansionary fiscal policies and tighter monetary policy from the Fed "all continue to weigh on the market," he added.
Treasury yields are still below their mid-December levels reached at the peak of a postelection bond selloff. After climbing from 1.867% on Election Day to a two-year high of 2.6% on Dec. 16, the 10-year yield began to fall back on uncertainty regarding the details and efficacy of Mr. Trump's policies.
Yields, though, climbed again last week after fresh data showed a continued increase in inflation and several Fed officials, including Fed Chairwoman Janet Yellen, warned of the negative consequences of tightening monetary policy too slowly following their December interest-rate increase.
For all the attention paid to developments in Washington, investors and analysts have pointed to improving economic fundamentals as a major reason why Treasury yields have recovered from the record lows they reached last summer.
If adopted, several policies endorsed by Mr. Trump, including tax cuts and increased spending on infrastructure, have the potential to diminish the value of outstanding government debt further by adding to the supply of bonds and providing a boost to growth and inflation.
Yet investors are also wary of some aspects of Mr. Trump's agenda such asmore protectionist trade policies.
Reflecting their conflicted view of the new administration, investors sold stocks and bought bonds Monday as Mr. Trump promised to punish companies that move jobs out of the country even as he also talked about cutting taxes "massively" for businesses and families.
Sentiment then shifted quickly Tuesday as the administration took steps to revive two oil-pipeline projects that had been rejected under the Obama administration.
"There's still a lot of uncertainty here," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.
The bond market, he added, has priced in some fiscal stimulus but isn't sure how much it will get and when, leading to choppy trading as investors try to "handicap where we're going to go without full information."
Also weighing on the Treasury market this week has been a series of new debt sales. After a $26 billion sale of two-year Treasury notes drew solid demand Tuesday, a $34 billion of new five year notes Wednesday elicited a more tepid reception.
A $28 billion sale of seven-year notes is due Thursday.
Write to Sam Goldfarb at firstname.lastname@example.org
(END) Dow Jones Newswires
January 25, 2017 16:26 ET (21:26 GMT)
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