U.S. government bond prices fell Wednesday as Congress approved the largest overhaul of the tax code in three decades, pushing yields higher in the latest leg of a multiday surge that comes after months of relative calm.
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The yield on the benchmark 10-year U.S. Treasury note settled at 2.497% from 2.464% on Tuesday, notching its largest four-day climb since July. The yield, which rises as bond prices fall, has climbed in eight of the past 10 sessions to its highest closing level since March 17.
The 10-year Treasury yield climbed above 2.4% on Tuesday as lawmakers advanced the tax overhaul, breaching a level it has struggled to cross since March. It rose to near 2.5% as Congress approved the revamp Wednesday, with some analysts saying the overhaul could boost growth and inflation, leading to further selling that could push yields higher still.
Many had predicted that would happen earlier this year, amid early optimism for a range of pro-growth proposals from President Donald Trump ranging from tax cuts to a increased infrastructure spending. The 10-year yield has instead traded within a relatively narrow range, even as the potential for changes to the tax code have buoyed major U.S. stock indexes as they hit record after record.
"Growth prospects are strong and getting stronger," said George Rusnak, co-head of global fixed-income strategy at the Wells Fargo Investment Institute. Some of that optimism about the stimulative effects of the tax bill could be "possibly filtering into inflation" as consumers with more disposable income push prices higher by spending more.
Foreign and domestic investors in November pushed $1.6 billion into Treasurys whose principal value adjusts for changes in inflation, the most since March, according to Wells Fargo Securities, a sign that some anticipate higher prices next year.
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Lackluster inflation data has been one of the biggest obstacles to a prolonged rise in the 10-year Treasury yield this year, according to many investors. Inflation is a threat to the value of long-term government bonds because it erodes the purchasing power of the securities' fixed payments.
The stall in the 10-year yield has contributed to a narrowing gap between shorter- and longer-term bond yields as the Federal Reserve has raised interest rates three times this year, pushing up the yield on the two-year Treasury note, which is more sensitive to expectations for central bank policy moves.
The recent climb in the 10-year yield is "clearly tax policy having an impact," said Kathy Jones, chief fixed income strategist at Charles Schwab. "There were really doubts that this would happen. Until the votes were actually assured and there was a little more clarity about what was in the bill, people would hold off."
The rise in yields following the plan's passage may be muted, however, as the economy is already in the ninth year of an expansion, making it one of the longest in U.S. history, some analysts said.
"It's very unusual to come into the latter stages of the business cycle and then all of a sudden take off" in terms of growth, said Wells Fargo's Rusnak. The potential for higher yields is "somewhat limited by where we are in the business cycle."
The 10-year yield remains below its 2017 high of 2.609% hit in March and investors including Ms. Jones said it may not immediately return to that level. Some have speculated that if policy makers perceive a threat of faster inflation stemming from the tax plan, they could accelerate the pace of future rate increases. Fed officials at their December meeting left unchanged forecasts for three increases in 2018 and two more the following year.
Yields on Treasury Inflation-Protected Securities indicate that investors forecast about 1.9% in average annual inflation over the next five years. That's up from 1.7% at the beginning of the month, though still less than the Fed's 2% target. Policy makers forecast inflation will reach the target in 2019.
Yet some investors may get spooked if the yields stay up near 2.5% or move higher, which could fuel more selling, said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
December 20, 2017 19:13 ET (00:13 GMT)