Prices of U.S. government bonds fell on a second consecutive session, driving the yield on the benchmark 10-year Treasury note to the highest level in more than a month.
The selling pressure was driven by new debt supply and ongoing market expectations that the Federal Reserve is l ikely to raise short-term interest rates again in June.
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The yield on the benchmark 10-year Treasury note settled at 2.405%, compared with 2.376% Monday. It marked the yield's highest close level since March 30. Yields rise as bond prices fall.
The 10-year yield has climbed from this year's low of 2.177% made in April, but it traded above 2.6% in mid-March.
A gauge of expected price swings in the bond market on Monday fell to the lowest level in more than two years. According to analysts, it is a sign investors don't expect a sharp rise in yields given some concerns surrounding U.S. growth momentum, the global ripples from China's actions to curb excessive borrowing and market bubbles, as well as the uncertainty looming over President Donald Trump's fiscal stimulus.
A $24 billion sale of three-year Treasury notes Tuesday afternoon drew average demand. Some analysts said bond yields need to rise further to entice buyers for two longer-dated bond sales in the following sessions.
A $23 billion sale of 10-year Treasury notes is due Wednesday, followed by a $15 billion sale of 30-year bonds Thursday.
Corporate bond sales have been robust this month, adding to selling pressure in Treasurys. Firms and banks that underwrite corporate debt sales typically sell Treasurys to hedge against unwanted interest-rate risks, reflecting the important role the Treasury debt market plays in global finance.
Last Friday's nonfarm jobs release pointed to a robust labor market, bolstering the Fed's case to tighten monetary policy further after raising its policy rate in March.
Fed-funds futures, used by investors to bet on the Fed's interest-rate policy outlook, showed 88% odds for the Fed to tighten monetary policy by its June 13-14 meeting, according to CME Group.
"There is continued selling pressure in the bond market in light of wider acceptance of Fed rate hikes this year that will be less sensitive to near-term economic or inflation data" than in 2016, said Jim Vogel, market strategist at FTN Financial.
Demand for haven assets has eased lately. Sunday's French elections deflated political risks in Europe. Centrist Emmanuel Macron defeated the far-right candidate, Marine Le Pen, who had threatened to pull the country out of the eurozone.
A survey showed investors have become the most bearish on Treasury bond prices since January. The share of investors expecting higher yields rose to 27% for the week that ended Monday from 25% a week earlier, according to J.P. Morgan's weekly Treasury client survey. The share of those expecting lower yields was flat at 16%.
Meanwhile, the Bank of America Merrill Lynch MOVE index, which tracks some derivatives linked to the value of Treasury bonds, settled at 55.4105 on Monday, according to data from Bank of America Merrill Lynch. That marked the lowest reading since Aug 2014.
Expectations for price swings in the U.S. stock market have also been sinking. The CBOE Volatility Index, or VIX, closed Monday at its lowest level since 1993.
John Canavan, market analyst at Stone and McCarthy Research Associates, said the markets would "stay calm and steady" as long as there isn't any interest-rate policy shock from the Fed or any surprise on fiscal policy.
Aaron Kohli, interest rates strategist at BMO Capital Markets, said low volatility in both stocks and bonds suggest there is still "a lot of liquidity in the markets right now that's driving risk appetite."
Treasury yields are widely seen as a yardstick to measure riskier assets including stocks, corporate bonds and emerging-market assets. So expectations of low volatility in the Treasury bond market encourage risk taking and drive investors to riskier markets. U.S. stocks, corporate bonds and emerging-market stocks and bonds have all strengthened this year.
Some analysts have said investors may be vulnerable to a rise in volatility.
"Complacency is never a good thing," said John Herrmann, rates strategist at MUFG Securities Americas Inc. "At present, there are many things to think about -- but the time to be complacent is not now."
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(END) Dow Jones Newswires
May 09, 2017 15:59 ET (19:59 GMT)