By Min Zeng
Government bonds on both sides of the Atlantic strengthened broadly Tuesday, taking a breather from a weekslong selloff driven by hopes of expansive fiscal policy from the new U.S. administration.
The yield on the benchmark 10-year Treasury note settled at 2.319%, compared with 2.335% Monday and a 12-month high of 2.337% Friday. Yields fall as bond prices rise.
The yield on the German bund fell to 0.227% and the 10-year U.K. gilt dropped to 1.368%. The 10-year yields in Italy, Spain, Portugal, Denmark and Sweden also retreated.
Some investors deem the selloff since the Nov. 8 election overdone, and they are finding these yields attractive. The 10-year Treasury yield logged the biggest rise in 15 years during the past two weeks.
Tuesday's bond price gains occurred when U.S. stocks reached fresh record highs and extended their record-setting streak over the past few days. Some analysts took this as a sign the pace of selling in the bond market may be easing in the near term.
The bond market rout "happened in a short amount of time and will likely take a break at these yield levels," said Sean Simko, head of fixed-income management at SEI Investments.
Also soothing some anxiety in the bond market: Two top officials at the European Central Bank, including President Mario Draghi, signaled a firm commitment to providing monetary stimulus as they are still struggling to push up inflation toward the ECB's desired target. Some economists expect the ECB to extend its bond buying program at a policy meeting in December.
A closely watched indicator of global investor sentiment toward the Treasury bond market improved after falling to its most bearish level in 10 months. The share of investors expecting higher Treasury bond prices rose to 14% for the week ended Monday, from 11% a week ago, according to the latest weekly Treasury clients survey from J.P. Morgan Chase & Co. The share of those expecting lower bond prices fell to 20% from 23%.
Analysts caution that the bond market is prone to renewed selling pressure.
A main trade since the U.S. election has been to sell Treasury debt and buy stocks because of the prospect of large deficit spending, lower taxes and lighter regulation advocated by President-elect Donald Trump. Many investors expect this policy outlook will boost U.S. growth, lift inflation and lead to a faster pace of interest rate increases by the Federal Reserve than many investors currently anticipate.
Inflation chips away bonds' fixed returns over time and is the big threat to the value of long-term government debt. Global data over the past two months have been showing upticks in inflation. A gauge of inflation expectation in the U.S. bond market has been rising closer to the Fed's 2% target.
John Canavan, market analyst at Stone and McCarthy Research Associates, said the 10-year Treasury yield could slip back to 2.2% at the end of this year. But "there is room for additional upside" in 2017 and the 10-year yield is likely to rise to 2.5%, he said.
Expectations have been growing the Fed would raise rates in December and potentially tighten policy at a faster pace than many investors anticipate. This has hurt demand for Treasury debt, especially short-term Treasurys whose yields are highly sensitive to the Fed's policy outlook.
The yield on the two-year Treasury note settled at 1.095%, matching the close level on Dec 29, which was the highest since April 2010. The yield was 1.084% Monday.New debt sales concentrated on short-term maturities this week contributed to higher yields.
The Treasury sold $34 billion of five-year Treasury notes Tuesday, which drew average demand. A $28 billion sale of seven-year notes is due Wednesday, the last leg of this week's new Treasury note offerings.
The bond market will be closed on Thursday for Thanksgiving.
Write to Min Zeng at email@example.com
(END) Dow Jones Newswires
November 22, 2016 16:14 ET (21:14 GMT)
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