U.S. Government Bonds Slide

By Min Zeng Features Dow Jones Newswires

Prices of U.S. government bonds fell Tuesday, with the yield on the benchmark 10-year Treasury note rising to the highest level in more than a month.

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The bond market was hurt by new debt supply. A $24 billion sale of three-year notes is due at 1 p.m. Tuesday, the first leg of this week's new Treasury debt offerings.

Corporate bond sales also weighed on Treasury prices. Firms and banks that underwrite corporate debt sales typically sell Treasurys to hedge against unwanted interest rate risks, reflecting the important role the Treasury debt market plays in global finance.

Demand for haven debt also retreated as U.S. stocks strengthened. The S&P 500 stock index hit a fresh intraday high Tuesday.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.407%, according to Tradeweb, compared with 2.376% Monday. Yields rise as bond prices fall.

The bond market has been softening in May after a big rally last month. The 10-year yield has climbed from this year's close low of 2.177% made April 18.

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Political risks in Europe dialed back after Sunday's French elections. Centrist Emmanuel Macron defeated the far-right candidate, Marine Le Pen, who had threatened to pull the country out of the eurozone.

Last Friday's nonfarm jobs report pointed to a robust labor market, bolstering the case for the Federal Reserve to raise short-term interest rates as soon as next month.

Federal-funds futures, used by investors to bet on the Fed's interest rate policy outlook, showed 88% odds for the Fed to tighten monetary policy by its June 13-14 meeting, according to CME Group. The odds were 78.5% Friday.

The Fed held its short-term interest rate unchanged last week after raising it in March. Policy makers signaled in the rate statement that the first-quarter soft patch in the economy may be transitory, a sign the Fed's tightening campaign remains on track.

"There is continued selling pressure in the bond market in light of wider acceptance of Fed rate hikes this year that will be less sensitive to near-term economic or inflation data" than in 2016, said Jim Vogel, market strategist at FTN Financial.

Investors typically reduce bond holdings in anticipation of tighter monetary policy because it tends to shrink the value of outstanding bonds.

The yield on the two-year Treasury note, highly sensitive to the Fed's policy outlook, was 1.351% Tuesday, compared with 1.33% Monday. The yield was close to its March 14 close of 1.38%, the highest close since June 8, 2009.

Despite the rise, the 10-year yield was still down from 2.446% traded at the end of 2016. In mid-March, it traded above 2.6%.

Investors continue to confront conflicting signals muddling the global growth outlook. One sign of caution has been a broad retreat of commodities, driven by Chinese authorities' credit-tightening to curb excessive borrowings and market bubbles.

Lower commodities prices raised some concern over China's growth momentum and potential global ripples. They also reduced investors' expectations toward inflation, which chips away bonds' fixed returns over time. As inflation angst eases, it encourages some investors to buy long-term government debt, keeping a lid on yields' ascent.

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

(END) Dow Jones Newswires

May 09, 2017 11:38 ET (15:38 GMT)