By Christopher Whittall and Carolyn Cui
Government-bond prices tumbled Wednesday, sending the yield on the 10-year U.S. Treasury note above 2% for the first time in eight months, the latest sign that investors are wagering that expansive fiscal spending under a Donald Trump administration will mean higher bond yields in coming years.
The price declines extend a bond-market selloff that began in earnest this summer after yields crashed to all-time lows in some countries following the U.K. decision to exit the European Union. Wednesday's selloff marked a sharp reversal from the initial market rally late Tuesday in response to signs Mr. Trump's candidacy was on the verge of a stunning upset in the U.S. presidential election.
The whipsaw trading wasn't limited to the benchmark 10-year debt. The yield on U.S. 30-year bonds soared to 2.809%, on course to post the biggest one-day loss since October 2011 in percentage terms.
Yields rose across the globe. In Germany, the 10-year bund's yield rose to 0.20%, after spending much of 2016 in negative territory. In Japan, the 10-year bond yield rose to minus 0.08%.
The jump in long-term rates led to a dramatic steepening of the Treasury yield curve, with the gap between the two-year and 10-year Treasury note yields increasing to 1.131 percentage points, up from 1.005 percentage points Tuesday. A steeper yield curve is generally taken as signaling of a more robust economic expansion, in part because it tends to boost the profits of banks, which profitfrom borrowing at low rates and lending at higher ones.
"With a steepening in the yield curve and rates going up, it's a reflection that we may finally see fiscal policy start to take off some of the weight off monetary policy," said Henry Smith, co-chief investment at Haverford Trust, with $6.1 billion in assets under management.
Much of the economic expansion over the past few years has been driven by easing monetary policy, with very little help on the fiscal side. The president-elect has promised a big boost in spending on defense and infrastructure, while also pledging to cut taxes steeply -- a plan that many analysts believe would expand budget deficits and likely add to upward pressure on bond yields, as investors demand greater compensation for lending to a country with widening deficits.
Investors are digesting "the fiscal implications of what a Trump presidency might mean," said Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management.
That "is a clear mandate that people want change. They want job creation, they want better growth," said Bob Michele, global head of fixed income at J.P. Morgan Asset Management. "All of these things suggest you're going to see a big fiscal spend."
"Now you have talk about a potential fiscal spend, then central banks can normalize [policy] more aggressively. That's what the market is beginning to price in," said Mr. Michele, who expects the 10-year Treasury yield to rise to at least 2.5% by Spring 2017.
Investors will be watching carefully for clues on how likely it is that Mr. Trump will push through increased fiscal stimulus.
The Republican party won both houses of Congress, but it is still unclear whether Mr. Trump can persuade fiscally-conservative house Republicans to support his plans.
"The fault line between him and Congress is that they're fiscally conservative -- his instincts are Reaganite in that deficits don't matter," said Eric Lonergan, a fund manager at M&G Investments.
Matthias Hoppe, a portfolio manager at Franklin Templeton Investments, said the bond market could get pulled in different directions if Mr. Trump manages to implement the policies he promoted during the election campaign.
A drop in U.S. trade would likely act as a drag on U.S. growth, he said, and should keep Treasury yields depressed. On the other hand, fiscal stimulus and increased government borrowing could send yields higher.
"It's difficult to assess which of the effects is going to take place first," said Mr. Hoppe.
Write to Christopher Whittall at firstname.lastname@example.org and Carolyn Cui at email@example.com
(END) Dow Jones Newswires
November 09, 2016 12:58 ET (17:58 GMT)
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