U.S. Government Bond Yields Move Higher

The yield on the benchmark U.S. 10-year Treasury note rose Friday to its highest level since May.

A stronger-than-forecast jobs report for June pushed up U.S. stocks Friday and sapped demand for haven bonds. The selling pressure in the bond market was contained by a wage indicator suggesting inflation isn't a big threat to bondholders.

The yield on the benchmark 10-year Treasury note settled at 2.393%, compared with 2.369% Thursday. It marked the yield's highest close since May 11. Yields rise as bond prices fall.

The yield has risen by 0.247 percentage point over the past two weeks following months of slides. One key factor driving investors to sell Treasury debt has been worries that major central banks may dial back monetary stimulus support given signs of broad improvement in the global economy.

Investors are particularly nervous over the European Central Bank's large bond-buying program, which has played a significant role in sending global government bond yields to historically low levels. Analysts have warned that the value of government bonds may fall when central banks pivot away from the highly accommodative monetary policy that followed the 2008 financial crisis.

"The bond market is starting to realize that the era of easy money is going to come to an end," said Ken Taubes, chief investment officer of U.S. investment management at Amundi Pioneer.

The eurozone has been at the center of the selloff in global bonds. The yield on 10-year German government debt, the region's benchmark, was 0.569% late Friday, the highest close since January 2016. It rose by more than 0.3 percentage point over the past two weeks.

Some money managers said any further selloff in German bonds is likely to rattle the Treasury debt market more, underscoring how closely correlated global bond markets have become driven by central banks' unconventional monetary policy.

In 2013, it was the Treasury bond market that led a global bond selloff driven by worries over reduced bond buying by the Federal Reserve. Now the tables have turned, and the Treasury bond market is sensitive to price swings in peers overseas.

Looming new debt sales may weigh on bond prices too, said some traders. A $24 billion sale of three-year Treasury notes is due Tuesday, followed by a $20 billion sale of 10-year notes Wednesday and $12 billion sale of 30-year bonds Thursday.

Also in focus, Fed Chairwoman Janet Yellen is scheduled to testify on monetary policy before Congress on Wednesday.

Bond yields remain at very low historical levels. The 10-year Treasury yield is still below the 2.446% it reached at the end of last year. In mid-March, the yield traded above 2.6%.

Some investors say it may be hard for bond yields to keep rising without inflation flaring up.

The market's subdued reaction Friday to the jobs report underscores how bond investors focus more on inflation readings. Average hourly earnings for private-sector workers rose 2.5% in June compared with a year earlier, little changed from prior months.

Inflation chips away investors' purchasing power on their bond investments over time and is seen as a main threat to long-term government debt. Ms. Yellen said recent slowing inflation readings would be transitory, yet some money managers say Ms. Yellen's assessment may be wrong.

Investors who expect inflation to stay muted don't expect a big rise in long-term Treasury bond yields, and some believe higher yields would be a buying opportunity.

"The lack of inflation remains a hurdle for the Fed to raise interest rates," said Gary Pollack, head of fixed-income trading at Deutsche Bank AG's private wealth management unit. "It would be hard for bond yields to rise sharply from here unless we see a clear trend of higher inflation."

The Japanese central bank acted Friday to contain higher bond yields. The yield on the 10-year Japanese government bond rose to a five-month high of 0.105% early Friday, prompting the central bank to announce a fixed-rate bond-buying operation, which sent yields back down to around 0.084%.

Write to Min Zeng at min.zeng@wsj.com @wsj.com>

Write to Min Zeng at min.zeng@wsj.com

The yield on the benchmark U.S. 10-year Treasury note rose Friday, capping the biggest two-week increase in nearly four months.

A stronger-than-forecast June jobs report Friday sapped demand for bonds, but the selling pressure was contained by a wage indicator that suggested inflation wasn't a pressing threat to bondholders.

The yield on the benchmark 10-year Treasury note settled at 2.393% -- its highest level since May 11 -- compared with 2.369% Thursday. The yield has climbed 0.247 percentage point in the past two weeks, the largest two-week gain since the week ending March 10. Yields rise as bond prices fall.

One key factor driving investors to sell Treasury debt has been worries that major central banks may dial back stimulus efforts after signs of broad improvement in the global economy.

Investors are in particularly nervous about the European Central Bank, whose large bond-buying program has played a key role in sending global government bond yields to historically low levels. Analysts have warned that the value of government bonds may fall when central banks pivot away from the highly accommodative monetary policy that followed the 2008 financial crisis.

"The bond market is starting to realize that the era of easy money is going to come to an end," said Ken Taubes, chief investment officer of U.S. investment management at Amundi Pioneer.

The eurozone has been the center of the selloff. The yield on the 10-year German government debt, the benchmark for the region's debt markets, was 0.569% late Friday, the highest close since January 2016, according to Tradeweb. It rose by more than 0.3 percentage point over the past two weeks, the biggest two-week increase since June 2015.

Some money managers said any further selloff in German bonds could further rattle the Treasury market, underscoring how closely tied global bond markets have become.

In 2013, the Treasury market led a global bond selloff driven by concerns about reduced bond buying by the Federal Reserve. Some analysts said the past two weeks show how sensitive the Treasury market has become to price swings in peers overseas.

Bond investors "must watch central bank policy evolution well beyond the U.S.'s borders," said Rick Rieder, chief investment officer of global fixed income at BlackRock Inc. The 10-year Treasury yield could rise to the range of 2.5% and 2.75% by the end of this year, he said.

Looming sales of new debt may weigh down bond prices too, said some traders. A $24 billion sale of three-year Treasury notes is due next Tuesday, followed by $20 billion sale of 10-year notes next Wednesday and $12 billion sale of 30-year bonds next Thursday.

Fed Chairwoman Janet Yellen is scheduled to testify before Congress next Wednesday on monetary policy, which may also impact the bond market.

Bond yields remain at very low levels from a historical standpoint. The 10-year Treasury yield is still below 2.446%, where it settled at the end of last year. In mid-March, the yield traded above 2.6%.

Some investors say it may be hard for the yield gains to persist without a flare-up in inflation. Inflation chips away investors' purchasing power on their bond investments over time and is seen by many as a main threat to long-term government debt.

The bond market's subdued reaction to Friday's jobs report underscores investors' focus on inflation readings. Average hourly earnings for private-sector workers rose 2.5% in June compared with a year earlier, little changed from prior months. Some investors said this suggested muted inflationary pressures, keeping a lid on yield gains.

Ms. Yellen has said recent tepid inflation readings would be transitory. Investors who expect inflation to stay muted don't anticipate a significant rise in long-term Treasury yields, and some believe higher yields would be a buying opportunity.

"The lack of inflation remains a hurdle for the Fed to raise interest rates," said Gary Pollack, head of fixed-income trading at Deutsche Bank AG's private wealth-management unit. "It would be hard for bond yields to rise sharply from here unless we see a clear trend of higher inflation."

The Bank of Japan took actions Friday aimed at containing higher bond yields. The yield on the 10-year Japanese government bond rose to a five-month high of 0.105% early Friday, prompting the BoJ to announce a fixed-rate bond-buying operation, which sent yields back down to around 0.084%.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

July 07, 2017 17:01 ET (21:01 GMT)