U.S. Government Bonds Fall on Strong GDP Report

MarketsDow Jones Newswires

Prices of U.S. government bonds pulled back Thursday after the U.S. economy was reported to have grown at a faster pace than initially reported by the government.

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Gross domestic product, a broad measure of the goods and services produced across the economy, expanded at annual rate of 3.5% in the third quarter, the Commerce Department said Thursday. The figure was revised upward from last month's 3.2% estimate, and is the strongest quarterly pace of growth in two years.

The highlight of the report is robust consumer spending, which added to optimism toward the world's largest economy. Brighter sentiment on growth tends to sap demand for haven debt.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.563%, near its highest point since Sept 2014, according to Tradeweb, compared with 2.544% Wednesday. Yields rise as bond prices fall.

The selling was moderate in the bond market. Many economists expect the third-quarter reading to be an outlier for the year. Forecasting firm Macroeconomic Advisers projected the economy to grow at a 1.6% rate in final three months of 2016, prior to the release of Thursday's data. Economists surveyed by The Wall Street Journal had forecast the economy to grow 1.9% for all of 2016 and 2.4% in 2017.

Trading is typically thinner than normal during the last two weeks of the year due to the Winter holiday season. This condition may magnify bond price swings in a selloff or a rally, traders say.

The bond market will be closed at 2 p.m. EST Friday and will remain shut Monday to observe the Christmas holiday.

Government bond yields in the developed world have been rising after falling to their historic lows in the summer.

Demand for haven debt has been diminishing as data over the past few months have showed improvement in the global manufacturing industry and upticks in inflation pressure. China's inflation indicator at a wholesale level has turned positive after years of below-zero readings, consumer price indexes in the eurozone and the U.K. have been rising, and wage pressure in the U.S. is heading upward. Inflation chips away bonds' fixed return and is a major threat to long-term government bonds.

Selling in the bond market had intensified after the U.S. election in early November. The prospect of expansive fiscal policy from President-elect Donald Trump in the coming year has added to expectations toward stronger economic growth and higher inflation. The Federal Reserve last week projected three rate increases for 2017, adding to expectations of higher bond yields.

"The path of least resistance certainly seems to be higher yields," said Mike Lorizio, senior fixed-income trader at Manulife Asset Management.

Mr. Lorizio said the large increase in bond yields in past weeks has reflected optimism over fiscal stimulus and economic growth, which are likely to reduce the likelihood of a sharp increase from here.

The 10-year Treasury yield is up more than one percentage point from its record low set in early July. Some investors and analysts say the bond market is in the process of normalizing from ultralow levels and that there is room for the yield to go higher if U.S. growth gains more traction. The yield was up modestly from 2.273% traded at the end of 2015, and was still less than half of where it traded in 2007.

One popular trade after the election has been selling Treasurys to buy stocks, sending U.S. benchmark equity indexes to record highs this month.

Stocks and corporate bonds have outpaced Treasury debt this year. The Dow Jones Industrial Average stock index has handed investors a total return of 14% this year through Wednesday, according to FactSet. U.S. corporate bonds issued by lower-rated firms, or junk bonds, have logged a total return of 17% over the same period, beating 0.7% on Treasury debt, according to Bloomberg Barclays bond indexes data. Return includes price changes and interest or dividend payments.

The selling pressure has been easing this week. After rising above 2.6% last week for the first time in more than two years, the 10-year yield has been trading between 2.529% and 2.590% so far this week.

Some analysts say the selloff is overdone and that the 10-year yield around 2.6% is attracting some buying interest.