U.S. Government Bonds Fall
Prices of U.S. government bonds fell Thursday after a brief bout of strength, reflecting the ripples from European Central Bank's latest signal that there is no hurry to pull back monetary stimulus.
The yield on the benchmark 10-year Treasury note settled at 2.195%, compared with 2.180% Wednesday. Yields rise as bond prices fall.
The ECB held interest-rate policy steady at its latest meeting. ECB President Mario Draghi gave a nod during a news conference to the improvement in the eurozone's economy, but downgraded the central bank's inflation forecasts for the next two years, a reason he believes that ultraloose monetary policy is still needed for economic recovery.
Mr. Draghi said he is ready to add stimulus if the growth outlook worsens.
The ECB's large monthly bond purchases have been playing an important role in pushing down global government bond yields to historically low levels. The latest reassurance that the ECB isn't ready to taper bond buying any time soon initially supported Treasury bond prices Thursday, with the 10-year yield falling to 2.178%.
Selling soon resumed as Mr. Draghi's comments encouraged investors to buy riskier government bonds from various European countries, a sign some investors believe prices of that debt will get a bigger boost from the ECB's stimulus.
Among the big winners were government bonds in Italy where the 10-year bond yield fell more than 0.1 percentage point Thursday, according to Tradeweb. The 10-year bond yield in Spain was down about 0.08 percentage point and the 10-year yield in Portugal was down 0.05 percentage point.
The yield on the 10-year German bund, the benchmark for eurozone's debt markets, fell to 0.245% earlier but traded at 0.254% late Thursday, compared with 0.253% Wednesday.
Lower German bund yields continue to make U.S. Treasury debt appealing to global investors in a low-yield world. This factor has reduced market expectations over a big rise in U.S. bond yields, encouraging some investors to buy when U.S. yields rise. The buying contributed to the 10-year Treasury yield's slide from this year's close high of 2.609% in March.
Bill Merz, director of fixed income at U.S. Bancorp Wealth Management, said the ECB is taking "a page from the playbook" by the Federal Reserve. A "slow and cautious manner" in signaling policy shift reduces the threat of a big selloff in the bond market, he said.
Central bank officials are mindful of the taper tantrum in the Treasury bond market during the summer of 2013. The 10-year Treasury rose sharply as comments from then-Fed Chairman Ben Bernanke about a possible cut in bond buying caught investors off guard. Higher Treasury yields rippled into many other fixed-income markets, caused a record pace of outflows from bond funds and tightened financial conditions for the U.S. economy.
Factors that contributed to higher Treasury yields Thursday: upbeat data out of China and Germany which sapped demand for haven assets. China's data showed improvement in both imports and exports, while industrial production in Germany beat economists' forecasts.
The 10-year Treasury yield fell to 2.147% Tuesday, the lowest close since November, as investors parked cash in haven assets to hedge risks related to the ECB, former FBI Director James Comey's congressional testimony and the U.K. election.
The yield ticked up Wednesday as anxiety pulled back. The release of Mr. Comey's prepared remarks Wednesday afternoon "appeared to diminish risks for some of the worst outcomes for the Trump administration," said Aaron Kohli, interest rates strategist at BMO Capital Markets.
Mr. Comey's testimony Thursday didn't move markets. Results of the U.K. elections are due after U.S. markets close.
The Fed is widely expected to raise short-term interest rates again next week after similar moves in December and March. Some disappointing economic releases and signs of decelerating inflation are casting some doubt over the Fed's plan in raising rates beyond June.
The prospect of a go-slow Fed has reduced investors' concerns about a big rise in long-term Treasury yields. This, coupled with slowing inflation, is encouraging investors to buy Treasurys. Since inflation chips away bonds' fixed returns over time, it is seen as a threat to long-term government debt.
Matt Freund, co-chief investment officer and head of fixed-income strategies at asset manager Calamos Investments, said the 10-year Treasury yield may end this year around where it traded Thursday.
"You have stock valuation at very high level, inflation is easing, energy prices are rolling over and there is no follow through in terms of President Donald Trump's fiscal agenda," said Mr. Freund. If these factors remain in place, a rise in Treasury yields would provide a buying opportunity, he said.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
June 08, 2017 16:33 ET (20:33 GMT)