U.S. Government Bonds Sell Off Ahead of Trump's Updates on Tax Plan

By Min Zeng Features Dow Jones Newswires

A broad wave of selling swept the U.S. government bond market on Tuesday as the Nasdaq Composite Index reached 6000 for the first time.

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The yield on the benchmark 10-year Treasury note settled at 2.330%, compared with 2.275% Monday. Yields rise as bond prices fall.

The two-day stock rally and price slump in haven bonds offer some tentative signs that the Trump trade regained some poise after a recent pullback. Buying stocks and selling Treasurys have been the popular ways for investors to bet that large fiscal stimulus would lead to stronger economic growth and higher inflation. The 10-year yield traded above 2.6% in mid-March and fell to a five-month low of 2.177% one week earlier.

President Donald Trump is scheduled to offer some updates on his tax plan on Wednesday. The Wall Street Journal reported Tuesday afternoon that Mr. Trump is planning to unveil a proposal to slash the top tax rate on so-called pass-through businesses, including many owner-operated companies, to 15% from 39.6%.

"Optimism expressed in the stock market about corporate earnings and tomorrow's tax announcement is finally taking a toll on Treasury bond prices," said Jim Vogel, market strategist at FTN Financial.

Mr. Vogel cautions that any disappointment Wednesday could hurt risk appetites and stoke demand for Treasury bonds again.

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Risk appetite has improved following Sunday's first round of French presidential elections. A mainstream candidate advanced as expected by many investors, reducing worries over a potential exit by France from the eurozone. This factor continued to boost sentiment Tuesday.

Also hurting bonds: Concerns over a shutdown of the U.S. federal government also have dialed back after Mr. Trump signaled willingness to wait longer to secure funding on his call for a border wall. Congress needs to pass a resolution this Friday when funding for the federal government is set to expire.

In addition, new debt sales contributed to higher bond yields Tuesday. The Treasury sold $26 billion of two-year notes Tuesday and is scheduled to sell $34 billion of five-year notes Wednesday and $28 billion of seven-year notes Thursday.

Selling in the bond market made the two-year sale attractive to buyers. A gauge of foreign demand rose to the highest since 2009.

U.S. Treasury bonds continue to offer more attractive yields than their peers in Germany, Japan and the U.K. in a still very low-yield world.

Some traders say the 10-year Treasury yield is unlikely to revisit 2.6% any time soon given the uncertainty surrounding the fiscal policy and economic growth outlook.

U.S. economic data have flagged some caution over the growth momentum. Tuesday, new home sales rose by 5.8%, a sign of a robust housing market. But a monthly gauge of consumer confidence fell to 120.3 from 124.9 in March.

Economists polled by The Wall Street Journal expect the U.S. government to report Friday that the U.S. economy grew at 1% during the first quarter of the year, down from 2.1% during the last quarter of 2016.

Another focus for bond investors this week is the European Central Bank's policy meeting Thursday. Some analysts say reduced political risk in France may allow the ECB to reduce monetary stimulus earlier than many investors expect, especially with data out of the eurozone showing improvement. This may drive investors to sell eurozone government bonds such as German bunds and the selling pressure could ripple into Treasury debt, traders say.

Government bond yields in France, Italy, Spain and Portugal fell Monday after the election results, but they rose along with government bond yields in Germany. The broad rise was driven by concerns over the ECB outlook, according to some traders.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

April 25, 2017 15:55 ET (19:55 GMT)