U.S. Government Bonds Retrace Early Price Declines

By Sam Goldfarb Features Dow Jones Newswires

Government bonds on both sides of the Atlantic pulled back Wednesday after a top Bank of England official said the central bank should start withdrawing stimulus later this year.

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Chief economist Andrew Haldane said in a speech that the risk of tightening monetary policy too early had declined and the risk of tightening too late had increased as economic growth and inflation in the U.K. had "shown greater resilience than expected."

The comments sent the yield on the 10-year U.K. bond as high as 1.048% from 0.980% just before they were reported, according to Tradeweb.

That helped pull other government bond yields modestly higher as well. In recent trading, the yield on the benchmark 10-year U.S. government note was 2.170%, according to Tradeweb, compared with 2.153% Wednesday. Yields rise when bond prices fall.

Bond-buying programs from central banks in Europe and Japan have played a large role in dragging down government bond yields in recent years. Investors are on the watch for any pullbacks, which could lead to more debt traded in the open market and higher yields.

Mr. Haldane was among five members of the Bank of England's policy-setting committee who had voted to keep policy unchanged at the central bank's June meeting, while three dissenting members had voted to raise interest rates. His change of position puts him at odds with Gov. Mark Carney, who made the case against raising interest rates in a speech Tuesday.

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Given that "he's been pretty dovish in the past," Mr. Haldane's remarks were "quite unexpected," said Shahid Ladha, head of strategy for G10 Rates Americas at BNP Paribas.

Also supporting yields Wednesday was an uptick in oil prices.

U.S. crude-oil prices fell Tuesday to their lowest level since September, extending this year's losses to nearly 20%.

Lower energy prices tend to deflate inflation expectations, making long-term Treasury debt more appealing, as inflation chips away the purchasing power from bond investments.

Recent data have pointed to slowing inflation in the U.S., boosting demand for Treasurys and lowering expectations for interest rate increases from the Federal Reserve. Despite that, Fed officials raised short-term interest rates last week and signaled that they remain on course to raise rates once more before the end of the year.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

Prices of U.S. government bonds recovered from early losses Wednesday, as further declines in oil prices stoked demand for safer assets.

Treasurys began the U.S. trading session on a down note after a top Bank of England official said the central bank should start withdrawing stimulus later this year. Oil prices were also firm to start the day but turned negative by the late morning as traders continued to focus on rising production.

The yield on the benchmark 10-year Treasury note, after reaching 2.177%, settled at 2.156%, compared with 2.153% Tuesday. Yields rise as bond prices fall.

Lower oil prices tend to aid Treasury debt in two ways. It can boost their appeal compared to riskier assets, such as stocks. It also eases worries over inflation, which poses a major threat to long-term government bonds by reducing the purchasing power of their fixed payments.

Oil prices entered bear market territory Tuesday, having declined 20.6% since Feb. 23.

Reflecting lowered inflation expectations, the Treasury debt with the longest time to maturity was a top performer Wednesday, with the yield on the 30-year bond settling at 2.724%, compared with 2.735% Tuesday.

If sustained, the decline in oil prices could raise more doubts about the Federal Reserve's plan to continue tightening monetary policy. Already, data showing a softening in inflation has been a big factor in driving down Treasury yields since the 10-year yield reached 2.6% in March.

"If the Fed is thinking about raising rates in September, they're going to need some better inflation data and the easiest way to get that is with oil starting to turn around," said Thomas Simons, senior vice president and money-market economist in the Fixed Income Group at Jefferies LLC

The Fed last week raised short-term interest rates for the third time since December and has signaled one more-rate increase by the end of the year. Several officials, including Chairwoman Janet Yellen, have suggested inflation should eventually pick up as a tightening labor market leads to higher wages.

Meanwhile, other central banks could also be moving closer to tighter policy.

In a speech Wednesday, BOE Chief Economist Andrew Haldane said the risk of tightening monetary policy too early had declined and the risk of tightening too late had increased as economic growth and inflation in the U.K. had "shown greater resilience than expected."

The comments sent the yield on the 10-year U.K. bond up around 0.07 percentage point to 1.048% before settling at 1.018%, according to Tradeweb.

Bond-buying programs from central banks in Europe and Japan have played a large role in dragging down government bond yields in recent years. Investors are on the watch for any pullbacks, which could lead to more debt traded in the open market and higher yields.

Mr. Haldane was among five members of the Bank of England's policy-setting committee who had voted to keep policy unchanged at the central bank's June meeting, while three dissenting members had voted to raise interest rates. His change of position puts him at odds with Gov. Mark Carney, who made the case against raising interest rates in a speech Tuesday.

Given that "he's been pretty dovish in the past," Mr. Haldane's remarks were "quite unexpected," said Shahid Ladha, head of strategy for G10 Rates Americas at BNP Paribas.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

June 21, 2017 16:06 ET (20:06 GMT)