U.S. Government Bonds Pull Back as Investors Anticipate Tighter Monetary Policies

U.S. government bond prices fell Tuesday, pushing the yield on the 10-year note above 2.4%, as investors continued to guard against tighter monetary policies.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.406%, according to Tradeweb, compared with 2.375% Monday.

Yields, which rise when bond prices fall, moved higher overnight in concert with yields on European government bonds, which have been climbing ahead of Thursday's European Central Bank meeting.

Investors in Europe and around the world are looking for signs that the ECB will cut back on its EUR60 billion in monthly bond purchases, which has made European government debt more scarce and helped drag down yields globally.

Meanwhile, investors are also preparing for tighter monetary policy in the U.S.

Federal Reserve Chairwoman Janet Yellen and other officials have repeatedly suggested that continued soft inflation won't dissuade them from gradually raising interest rates. Many investors also think there is a good chance that President Donald Trump could nominate a replacement for Ms. Yellen who would quicken the pace of interest-rate increases.

There is an "overriding concern about the direction that the Fed is going," said Mary Ann Hurley, vice president of fixed income trading in Seattle at D.A. Davidson & Co.

Ms. Yellen has "indicated that tightening is going to continue and she's the most dovish of the candidates" to lead the Fed over the next four years, she added.

Another factor weighing on Treasurys were upcoming debt auctions that will add to the supply of outstanding bonds. The Treasury Department is scheduled to sell $26 billion of two-year notes Tuesday, $34 billion of five-year notes Wednesday and $28 billion of seven-year notes Thursday.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

Investors sold Treasury bonds Tuesday, causing the yield on the 10-year note to settle above 2.4% for the first time in more than five months, as they prepared for central banks to back away from years of stimulus efforts.

Breaching 2.4% marks an important milestone for the bond market, some analysts said. Yields have peaked at that level on several occasions, as investors swooped in to buy bonds at lower prices. If the yield climbs further, however, it could also prompt more selling.

"It's the market at a precipice," said Gennadiy Goldberg, a Treasury strategist at TD Securities. "It's making a lot of people perk up and notice that we're at a potential turning point."

The 10-year yield, which serves as a benchmark for loans made to companies, home buyers and consumers across the country, climbed to 2.406% from 2.375% Monday. It's the first time the yield has closed above 2.4% since May 11. Yields rise as bond prices fall.

The latest gains put the yield within striking distance of where it finished 2016. Yields rose sharply after Donald Trump's surprise victory in the 2016 presidential election raised expectations he would pursue policies expected to boost growth and inflation, including tax cuts, regulatory rollbacks and significant increases in infrastructure spending.

The 10-year yield peaked at 2.609% on March 13, about a week after Republicans introduced a plan to overhaul health care, then slipped again as the Trump administration struggled to enact that and other policies.

The strength of the bond market this year has surprised some analysts, particularly with the Dow Jones Industrial Average hitting 54 records in 2017. Of those, 42 occurred when the yield was lower than 2.4%, while 12 have come when the yield was 2.4% or higher.

Bond yields have climbed in recent weeks, spurred by signals that the Federal Reserve will maintain a steady course of interest-rate increases and signs of progress on lawmakers' efforts to overhaul the tax code. On Tuesday, yields began rising overnight in concert with yields on European government bonds, which have been climbing ahead of Thursday's European Central Bank meeting.

Investors in Europe and around the world are watching for signs that the ECB will cut back on its EUR60 billion in monthly bond purchases, which has made European government debt more scarce and helped drag down yields globally. As the ECB has pushed its short-term benchmark rate below zero and started buying European sovereign and corporate debt, investors have sought higher-yielding securities in the U.S.

There could be "some kind of tantrum," reminiscent of the 2013 jump in yields related to the Fed's tapering of bond purchases, should the ECB surprise investors with a policy decision that threatens to send yields sharply higher, said Andrew Brenner, head of global fixed income at National Alliance Capital Markets.

The European bond-buying has helped counteract the impact on U.S. bond yields by the Fed's decision to raise interest rates three times since December, some analysts said. The Fed indicated at its September meeting that policy makers are prepared to raise rates four more times by the end of 2018.

Fed Chairwoman Janet Yellen and other officials have repeatedly suggested that continued softness in inflation data won't dissuade them from gradually raising interest rates. Inflation is a threat to long-term government bonds because it erodes the purchasing power of their fixed payments.

Many investors also think that Mr. Trump could nominate a replacement for Ms. Yellen who would quicken the pace of interest-rate increases.

There is an "overriding concern about the direction that the Fed is going," said Mary Ann Hurley, vice president of fixed income trading in Seattle at D.A. Davidson & Co.

Ms. Yellen has "indicated that tightening is going to continue and she's the most dovish of the candidates" for the job of leading the Fed over the next four years, she added.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

October 24, 2017 18:56 ET (22:56 GMT)