U.S. Government Bonds Weaken After Geopolitical Tensions Ease

By Daniel Kruger Features Dow Jones Newswires

U.S. government bond prices fell ahead of a scheduled auction of $20 billion of 10-year notes.

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The yield on the benchmark 10-year U.S. Treasury note was recently at 2.167%, according to Tradeweb, compared with 2.125% on Monday. Yields rise as bond prices fall.

Tuesday's auction is expected to price at the lowest yield for a 10-year offering since November, when it was sold at roughly 2.02%, making some analysts concerned that investors may have sticker shock at the current levels. They may also be apprehensive about buying long-term securities before the Federal Reserve's upcoming meeting on Sept. 19-20.

Investors also sold government debt as damage from Hurricanes Harvey and Irma didn't reach worst-case scenarios and concerns about North Korea and the debt ceiling have receded.

With recovery efforts under way, traders are beginning to assess the potential for the federal aid headed to Texas and Florida to temporarily lift economic growth. The Trump administration and Congress agreed to a $15.25 billion relief package for regions affected by the storms which, at the same time, postponed until December the government's deadline to address its borrowing limit.

Concerns about geopolitical tensions and the debt ceiling had also stoked demand for the safety of Treasurys recently.

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"All of a sudden you've got some pressure on bonds," said Andrew Brenner, head of global fixed income National Alliance Capital Markets in New York. "There's a lot of good reasons" for bond prices to fall.

Investors are also looking ahead to the possibility of the Fed positioning itself for a third interest rate increase this year at its December meeting, as well as anticipating the start of efforts to scale back the central bank's reinvestment in maturing Treasury and mortgage securities held on its $4.5 trillion balance sheet.

Data on producer prices Wednesday and consumer prices on Thursday will give investors a read on whether softening inflation, which has helped push down bond yields, will prevent the Fed from additional tightening this year. Fed governor Lael Brainard recently said the central bank should be cautious about raising rates further until policy makers are more confident they can bring inflation up to their 2% target.

"A December rate hike would be particularly data dependent," said Ian Lyngen, head of government bond strategy at BMO Capital Markets in New York.

U.S. government bond weakened for a second consecutive day as investors sold assets perceived as relatively safe after Hurricane Irma abated and geopolitical tensions eased.

The yield on the benchmark 10-year U.S. Treasury note rose to 2.171% Tuesday from 2.125% Monday, notching its biggest two-day jump since early March. Yields rise as prices fall.

Demand for safer assets such as Treasurys has softened this week as damage from Hurricane Irma appeared less than the worst-case scenarios feared by investors and geopolitical concerns spurred by recent North Korean nuclear tests receded. Gold, another preferred haven for investors in periods of risk, also fell for a second day after hitting a 52-week high Friday.

Investors' tepid response to a $20 billion auction of 10-year notes reflected their reassessment of the risks facing the economy, some analysts said. The offering attracted below-average demand from investors, with the yield on the securities reaching its lowest level for an auction since November.

With hurricane recovery efforts under way, investors were beginning to assess the potential for the federal aid headed to Texas and Florida to temporarily lift economic growth. The Trump administration and Congress agreed to a $15.25 billion relief package for regions affected by the storms, and also postponed until December the government's deadline to address its borrowing limit.

Investors may also be apprehensive about buying long-term securities before the Federal Reserve's meeting next week, some analysts said.

"All of a sudden you've got some pressure on bonds," said Andrew Brenner, head of global fixed income National Alliance Capital Markets in New York. "There's a lot of good reasons" for bond prices to fall.

Investors are also looking ahead to the possibility of the Fed positioning itself for a third interest-rate increase this year at its December meeting, as well as anticipating the start of efforts to scale back the central bank's balance sheet.

Data on producer prices Wednesday and consumer prices on Thursday will give investors a read on whether softening inflation, which has helped push down bond yields, will prevent the Fed from additional tightening this year. Fed governor Lael Brainard recently said the central bank should be cautious about raising rates further until policy makers are more confident they can bring inflation up to their 2% target.

(END) Dow Jones Newswires

September 12, 2017 16:34 ET (20:34 GMT)