U.S. Government Bonds Retreat

By Min ZengFeaturesDow Jones Newswires

U.S. government bonds pulled back Wednesday following the biggest one-day price rally in more than a month as demand for haven assets retreated.

The yield on the benchmark 10-year Treasury note closed at 2.202%, compared with a five-month low of 2.177% Tuesday. Yields rise as bond prices fall.

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Some other haven assets -- gold, German bunds and the Japanese yen -- also weakened Wednesday.

Investors had flocked to the harbor of Treasury debt a day earlier, driven by geopolitical worries over North Korea and Syria and uncertainty surrounding the first round of French presidential race this Sunday. U.K. Prime Minister Theresa May on Tuesday announced plans to call a snap general election in June, injecting a fresh layer of uncertainty in Europe.

"It is just a small [retreat] in this massive risk-off move," said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc. "The scary news seems to have taken a breather for a day."

Government bond yields in France fell Wednesday, as the latest poll showed Centrist Emmanuel Macron maintained his lead. The yield on the 10-year French government bond was 0.880%, compared with 0.902% Tuesday, according to Tradeweb.

Some traders said this provided a reason for some investors to lighten up on haven bonds including bunds and Treasurys. A 30-year German government bond auction drew tepid demand Wednesday, also contributing to higher yields in bunds and Treasurys.

The yield on the 10-year German bund was 0.197%, compared with 0.174% Tuesday.

French government bond yields have jumped from 0.685% at the end of 2016, with its premium over German bunds widening, reflecting investors are hedging against the muddy elections.

The biggest risk for global markets, say analysts, is that both the far-right and the far-left candidates prevailed Sunday.

In recent days, a surge in opinion polls has placed Jean-Luc Melenchon, a left-wing firebrand who promises higher wages and fewer working hours, as a potential candidate to move past this Sunday's first round of voting. That could set up a second-round vote in May 7 with Marine Le Pen, an economic nationalist who wants to pull France out of the euro.

Daniel Mulholland, head of U.S. Treasury trading at Crédit Agricole, said that in this situation Treasury bonds "would be a big flight to quality parking spot for any available cash."

Some traders say the 10-year Treasury yield could sink to 2% or below that if haven demand intensified.

Geopolitical risks aren't the only reason that have driven investors back to the bond market over the past weeks after a recent selloff. Other factors boosting bond prices: question over the U.S. growth momentum after a number of disappointing economic releases this month and fading optimism toward President Donald Trump's capability to push through his fiscal stimulus agenda following the failed health care reform bill.

The 10-year yield traded above 2.6% in mid-March. The yield remains above 1.867% on Nov. 8 -- the U.S. Election Day.

Some analysts aren't convinced that bond yields' slides would last.

Blake Gwinn, U.S. rates strategist at NatWest Markets, expects the 10-year Treasury yield to rise to 2.9% at the end of this year, driven by his expectation that the U.S. economy would rebound from a soft patch.

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

(END) Dow Jones Newswires

April 19, 2017 15:56 ET (19:56 GMT)