U.S. Treasury Bonds Fall On Strong Data And Looming Supply

By Daniel Kruger Features Dow Jones Newswires

U.S. government bond prices fell as data showed the economy is poised to continue at a solid pace of growth.

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The yield on the benchmark 10-year Treasury note rose to 2.399%, according to Tradeweb, from 2.376% Wednesday. Bond yields rise as prices fall.

Yields climbed after the price index for personal-consumption expenditures -- the Federal Reserve's preferred inflation gauge -- rose 0.1% in October, the smallest gain since July. Prices rose 1.6% in October from a year before, holding below the central bank's 2% target for an eighth consecutive month.

Personal spending, reflecting consumer purchases of everything from cars to dental visits, increased 0.3% in October from a month earlier, after climbing 0.9% in September, the biggest increase since 2009, the Commerce Department said Thursday. Personal incomes -- reflecting Americans' wages, investment earnings and government aid -- rose 0.4% in October, matching September's pace.

Inflation is a threat to the value of long-term government bonds because it erodes the purchasing power of their fixed payments.

Also sapping some demand for Treasurys: state and local governments, whose interest payments are exempt from federal taxes, are rushing to the debt market to raise capital as Congress is working toward an overhaul of the tax code, some investors said.

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"There's going to be a lot of supply coming into the market in December, " said Thomas Tucci, head of Treasury trading at CIBC World Markets Inc. "People are positioning for higher rates."

The Fed forecast in September that it would raise rates once more this year and three more times in 2018. Jerome Powell, President Donald Trump's nominee to replace Janet Yellen as head of the central bank, stressed policy continuity at his Senate confirmation hearing Tuesday. The Fed will update its projections for monetary policy and its estimates for economic growth at the conclusion of its two-day meeting Dec. 13.

U.S. government-bond prices fell after signs that Senate Republicans are moving closer to passing a tax overhaul.

The yield on the benchmark 10-year U.S. Treasury note climbed to 2.417% from 2.376% Wednesday, the highest closing level since Oct. 27. Bond yields have risen for three consecutive months. Yields rise as prices fall.

Bonds weakened and stocks gained as the bill's prospects improved in recent sessions and economic data boosted hopes for rising growth and inflation. Some investors and analysts expect tax cuts to lead the Federal Reserve to consider accelerating its timetable for raising interest rates, and several said the overhaul could increase the deficit, leading to new bond issuance.

The severity of Thursday's move, the biggest one-day yield gain in almost three weeks, suggests that investors had remained skeptical about the tax bill's prospects after repeated efforts to overhaul health care, some analysts said.

"Obviously, a lot of people hadn't factored in passage of the tax plan," said Thomas Roth, managing director in the rates trading group at MUFG Securities Americas Inc. "It's going to move the needle on how the Fed has to react."

Earlier Thursday, yields climbed after Commerce Department data showed growth in spending and household incomes. The price index for personal-consumption expenditures -- the Fed's preferred inflation gauge -- rose 0.1% in October, the smallest gain since July. Prices rose 1.6% in October from a year before, holding below the central bank's 2% target for an eighth consecutive month.

Many investors expect the Fed to raise rates in December, despite softness in inflation. The Fed forecast in September that it would raise rates once more this year and three more times in 2018. The Fed will update its projections for monetary policy and its estimates for economic growth at the conclusion of its two-day meeting on Dec. 13.

Write to Daniel Kruger at daniel.kruger@wsj.com

(END) Dow Jones Newswires

November 30, 2017 18:36 ET (23:36 GMT)