U.S. Government Bonds Fall Broadly

By Min ZengFeaturesDow Jones Newswires

U.S. government bonds fell broadly on the first day of May after logging the biggest monthly price rally since last June.

Selling pressure hit the bond market after Treasury Secretary Steven Mnuchin said Monday that ultralong bonds "could absolutely make sense." It is the latest sign investors are concerned over the potential issuance of debt that mature in more than three decades.

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The remark came ahead of the Treasury's release of its quarterly refunding announcement Wednesday, a major platform for officials to make big changes regarding Treasury auctions.

Mr. Mnuchin said in February that the Treasury should study the viability of issuing longer-dated bonds with 50-year and 100-year maturities. Debate has been growing lately on whether the Treasury may consider selling ultralong bonds to fund its large fiscal stimulus down the road. The longest maturity the Treasury sells to investors now is 30 years.

"With refunding announcement later this week, it seems markets are on edge to any sort of new supply or new forms of supply," said George Goncalves, head of fixed-income strategy in the Americas for Nomura Securities International.

The yield on the benchmark 10-year Treasury note settled at 2.327%, compared with 2.282% Friday. Yields rise as bond prices fall.

The 30-year bond was the biggest loser Monday, with its yield rising to 3.012% from 2.952% Friday. The yield premium investors demanded to own the 30-year bond relative to the benchmark 10-year note was 0.685 percentage point, the highest since December.

Some analysts say it is premature for the Treasury to hash out a game plan so soon. In recent years, the Treasury had raised the question of issuing ultralong bonds but had refrained from issuing them.

While comments from Mr. Mnuchin over the past few months suggest this government under President Donald Trump is more serious in considering issuing ultralong bonds, analysts say the Treasury is likely to spend more time studying the issue.

One problem, say analysts, is that demand for ultralong bonds could be fickle. Another risk is a shift in the Federal Reserve's monetary stimulus. Large bond purchases by the Fed in recent years have helped keep long-term government bond yields at historically low levels. Now the Fed is on the cusp of unwinding its balance sheet, which could put upward pressure on long-term bond yields and raise the federal government's funding costs, say analysts.

"The biggest stumbling block is what is the best way to introduce ultralong bonds," said Lou Crandall, chief economist at Wrightson ICAP, a widely followed specialist on Treasury finance. "It is too early for the Treasury to make a commitment."

To lay the groundwork for the introduction of ultralong bonds, Mr. Crandall said he expects the Treasury this Wednesday will boost the sizes of both the 10-year note and 30-year bonds this quarter, by perhaps $2 billion apiece.

Demand for haven bonds also retreated on Monday after congressional leaders reached an agreement to fund the government through Sept. 30. The deal avoided a potential federal government shutdown.

Another factor sending yields higher Monday: Both President Donald Trump and Vice President Mike Pence in television interviews Sunday suggested confidence that they could win enough votes to pass a bill to undo the Affordable Care Act.

The bond market had briefly pared price declines earlier in the session after a disappointing manufacturing release raised some questions toward the U.S. economic growth momentum.

The monthly manufacturing index from the Institute for Supply Management fell to 54.8 last month from 57.2 in March. Economists had expected a 56.5 reading. A reading above 50 signals expansion, while a reading below 50 suggests contraction.

The 10-year Treasury yield has fallen after a big rise since the U.S. election in November. The yield traded above 2.6% in mid-March. In April, the yield declined by 0.114 percentage points, the largest one-month decline since June 2016.

A confluence of factors has boosted demand for bonds again. Investors are skeptical over Mr. Trump's capability to push through his fiscal agenda soon. A number of economic releases over the past month have been disappointing. Friday's data showed the U.S. economy grew at the slowest pace in three years during the first quarter of 2017.

This week is packed with some key economic releases. Wednesday, a private-sector jobs report and the ISM's service index are due, followed by Friday's nonfarm employment report.

The Fed is scheduled to start its two-day policy meeting Tuesday, and is widely expected to hold short-term interest rates steady after a rate increase in March. Some Fed officials have signaled in recent weeks that the door remains open for the Fed to raise rates again in June.

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

(END) Dow Jones Newswires

May 01, 2017 16:01 ET (20:01 GMT)