Prices of U.S. government bonds pulled back for a second consecutive session Thursday, with the yield on the benchmark 10-year note rising to the highest level in more than three weeks.
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Traders said the selling was a follow-through from Wednesday when the Federal Reserve's latest policy statement left the door open to raise interest rates as soon as next month. Investors typically reduce bondholdings in anticipation of tighter monetary policy because it tends to shrink the value of outstanding bonds.
"The bond market is saying that the Fed is likely on course for a June rate rise," said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP.
Also hurting Treasury bond prices: a selloff in German government bonds rippling into the U.S.; new corporate bond supply highlighted by Apple Inc.'s $7 billion offering; a report Thursday showed a measure of wage inflation climbed last quarter; and optimism toward Friday's nonfarm jobs report forecast by economists to show jobs growth regained momentum in April.
The yield on the benchmark 10-year Treasury note settled at 2.354%, compared with 2.309% Wednesday. It marked the yield's highest close since April 10. Yields rise as bond prices fall.
The yield was still lower compared with 2.446% at the end of 2016. It traded above 2.6% shortly before the Fed's decision to raise rates in March.
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Matt Freund, co-chief investment officer and head of fixed-income strategies at asset manager Calamos Investments, said "a dramatic rise" in the yield on the U.S. 10-year Treasury note is unlikely given that Treasurys continue to offer much higher yields compared with their peers in many other developed countries, such as Germany and Japan.
The yield on the 10-year German bund rose to 0.386% from 0.329% Wednesday, marking the highest close level since March 27, according to Tradeweb.
Mr. Freund said he prefers corporate bonds to Treasurys in this still-low-yield world with the risk of a U.S. economic recession over the next few quarters remaining small. But he said he would consider buying Treasurys if yields rise to attractive levels.
Friday's nonfarm employment report is a key datapoint for investors to gauge the growth outlook. Economists expect the U.S. economy added 188,000 new jobs in April, up from 98,000 in March. Wage inflation, via the average hourly earnings from the jobs report, also will be scrutinized.
The bond market is likely to suffer further selling pressure if the report shows solid jobs growth or signs that wage inflation picks up speed, thus bolstering the Fed's case to tighten policy next month, said traders.
Fed funds futures, used by investors to place bets on the Fed's interest rate policy, showed 74% odds that the Fed would tighten policy by its June meeting, according to CME Group. The probability was 62% one month ago.
Analysts say the high probability suggests many investors believe the U.S. economy can cope with another moderate increase in the Fed's policy rate. U.S. stocks traded near a record high, reflecting confidence in the U.S. economy and the Fed's tightening plan.
A report Thursday showed unit labor costs, a gauge of wage inflation, jumped to 3% during the first quarter of this year, compared with 1.3% during the final quarter of 2016. Inflation erodes bonds' fixed returns over time.
Some analysts caution that a broad retreat in commodities flags some downside risk on inflation.
Thursday, U.S. crude oil prices fell by nearly 5% to settle at the lowest level since November. Lower energy prices have reduced inflation expectations. Traders said the oil market rout helped the bond market recoup some price losses Thursday.
Praveen Korapaty, head of interest-rate strategy at Credit Suisse, said a June rate increase is "far from being a sure bet." Market expectations for the Fed would be adjusted lower if upcoming data prove the Fed wrong on its economic or inflation assessment, he said.
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(END) Dow Jones Newswires
May 04, 2017 16:38 ET (20:38 GMT)