Treasurys Pull Back as AT&T Prints Year's Largest Corporate-Bond Deal

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds pulled back Thursday as investors prepared for a jumbo bond offering from AT&T Inc. and the last of this week's Treasury note auctions.

Continue Reading Below

In recent trading, the yield on the 10-year Treasury note was 2.310%, according to Tradeweb, compared with 2.285% Wednesday. Yields rise when bond prices fall.

AT&T is poised Thursday to sell around $15 billion to $20 billion of bonds to help fund its pending acquisition of Time Warner Inc., investors said. That would make it either the largest or second-largest U.S. corporate bond deal of the year, depending on whether it exceeds the $17 billion of bonds sold by Microsoft Corp. in January, according to Dealogic.

Underwriters typically sell Treasury debt to neutralize unwanted swings in interest rates in the lead-up to corporate bond deals before buying Treasurys again when the deal are completed.

Corporate bonds also offer more attractive yields compared with government bonds, which entice buyers in a low-yield environment.

Adding to the pressure on government bonds, a $28 billion auction of seven-year Treasury notes is scheduled for Thursday, following sales of two-year and five-year notes earlier in the week.

Continue Reading Below

Fresh data also showed that sales of durable goods rose in June at the quickest pace in nearly three years, providing a relatively upbeat assessment of the economy a day before investors get their first reading on second-quarter economic growth.

AT&T's offering is "a big deal, but we also got better-than-expected durable goods numbers this morning." said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. "That combination is weighing on the market."

Thursday's move added to a choppy run of trading sessions for Treasurys, which sold off to start the week before rallying Wednesday in the aftermath of the Federal Reserve's latest policy statement.

Investors and analysts said the statement generally offered few surprises, leaving the door open to another interest-rate increase this year but not committing to one. That boosted the appeal of Treasurys, which generally benefit from looser monetary policy.

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

U.S. government bonds pulled back Thursday as investors prepared for a jumbo bond offering from AT&T Inc. and the last of this week's Treasury-note auctions.

The yield on the 10-year Treasury note settled at 2.312%, compared with 2.285% Wednesday. Yields rise when bond prices fall.

Treasurys were pressured in part by AT&T, which was poised to sell $22.5 billion of bonds to help fund its pending acquisition of Time Warner Inc. That marks the largest U.S. corporate bond deal since January 2016, when Anheuser-Busch InBev NV issued $46 billion of bonds to investors, according to Dealogic.

Large corporate-debt sales can sometimes make a dent in the Treasurys market as underwriters sell Treasurys to neutralize unwanted swings in interest rates and fund managers look to free up cash to absorb the new bonds.

A $28 billion auction of seven-year Treasury notes also weighed on the market Thursday, following sales of two-year and five-year notes earlier in the week.

In addition, fresh data showed that sales of durable goods rose in June at the quickest pace in nearly three years, providing a relatively upbeat assessment of the economy a day before investors get their first reading on second-quarter economic growth.

AT&T's offering was "a big deal, but we also got better-than-expected durable goods numbers," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. "That combination is weighing on the market."

Thursday's move added to a choppy run of trading sessions for Treasurys, which sold off to start the week before rallying Wednesday after the Federal Reserve left interest rates unchanged and issued its latest policy statement.

Investors and analysts said the statement generally offered few surprises, leaving the door open to another interest-rate increase this year but not committing to one. That boosted the appeal of Treasurys, which generally benefit from looser monetary policy.

Months of soft inflation data have helped support bond prices, as lower inflation helps preserve the purchasing power their fixed payments. Tepid inflation has also depressed expectations for future rate-increases from the Fed. Though higher than the historic lows it reached in 2016, the yield on the 10-year note is still well below where it started the year.

The strong reception for AT&T's bond sale suggests that investors don't anticipate a big rise in Treasury yields, which would hurt the value of high-quality corporate debt, said Scott Kimball, portfolio manager of BMO TCH Core Plus Bond Fund.

Current market indicators suggest investors are highly skeptical that inflation will reach the Fed's 2% target. "In that case, it's difficult to envision rates move higher in a way that's detrimental to investors," Mr. Kimball said.

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

(END) Dow Jones Newswires

July 27, 2017 16:46 ET (20:46 GMT)