U.S. Government Bonds Rise on Geopolitical Risks

By Daniel Kruger Features Dow Jones Newswires

U.S. government bonds strengthened Thursday amid doubts about an expected pickup in growth and inflation and concerns that the prospects for tax overhaul legislation remain murky.

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The yield on the benchmark 10-year U.S. Treasury note fell to 2.336%, according to Tradeweb, from 2.346% Wednesday. Yields fall as bond prices rise.

Economists are divided about the impact proposed changes to the tax code would have on U.S. growth. Investors are concerned that the bill will be crafted to ensure a legislative victory for Republicans rather than to produce long-term growth.

"The reflation trade is in doubt," said Christopher Sullivan, a bond fund managers with the United Nations Federal Credit Union in New York. The politics behind tax legislation and fiscal policy are becoming "more and more uncertain," he said.

Yields moved briefly higher as solid data on labor and inflation raised expectations that Friday's report on consumer prices could show that inflation will be strong enough for Fed rate increases to match the central bank's forecasts.

Initial jobless claims, a proxy for layoffs across the U.S., decreased by 15,000 to a seasonally adjusted 243,000 in the week ended Oct. 7, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal expected 252,000 new claims last week. Claims surged last month, hitting 298,000 after Hurricane Harvey hit Texas and Louisiana. Producer prices also rose 0.4% in September and 2.6% from a year ago, the largest increase since February 2012.

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The expectation for rate increases in December and three more times in 2018 "becomes more credible," said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York.

Fed-funds futures, used by investors to place bets on central bank policy, recently showed an 88% probability for a rate rise by year-end, up from 41% a month ago, according to CME Group.

U.S. government bond prices rose Thursday as investors focused on geopolitical risks and the outlook for inflation and Federal Reserve policy.

The yield on the benchmark 10-year U.S. Treasury note fell to 2.323%, the lowest since Sept. 28, from 2.346% Wednesday. Yields fall as bond prices rise.

Investors bought Treasurys after the U.S. Geological Service reported an event with "earthquake-like characteristics" in an area of North Korea where nuclear tests have been conducted. Also spurring demand for bonds was a U.S. proposal to let the North American Free Trade Agreement expire after five years unless the U.S., Canada and Mexico each renew it.

"There was quite a bit of bad news," said Aaron Kohli, an interest-rate strategist with BMO Capital Markets.

Yields moved briefly higher earlier in the session as labor and inflation data raised expectations that Friday's report on consumer prices could show that inflation will be strong enough for the Fed's course of rate increases to match the central bank's forecasts. Central bank officials have suggested they are inclined to raise rates once more this year and three times in 2018.

Initial jobless claims, a proxy for layoffs across the U.S., decreased by 15,000 to a seasonally adjusted 243,000 in the week ended Oct. 7, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal expected 252,000 new claims last week. Claims surged last month, hitting 298,000 after Hurricane Harvey hit Texas and Louisiana. Producer prices also rose 0.4% in September and 2.6% from a year ago, the largest increase since February 2012.

Signs of tepid inflation have limited selling in Treasurys recently. Inflation can threaten the value of long-term government bonds because it erodes the purchasing power of their fixed payments. Central bank officials have said they expect recent weak inflation readings are caused by transitory factors.

If a strong CPI report "doesn't rescue the Fed's thesis on inflation, the market is primed for a bounce," Mr. Kohli said.

(END) Dow Jones Newswires

October 12, 2017 16:27 ET (20:27 GMT)