Treasury Bonds Strengthen
February 28 2017 - 10:46AM
Dow Jones News
By Min Zeng
The U.S. government bond market strengthened after Monday's
selloff, boosted by purchases from fund managers making month-end
adjustments to their portfolios.
The moderate price gain suggests many investors are refraining
from placing large bets on the bond market as they await President
Donald Trump's first formal address to the nation since his
inauguration. The speech could affect asset allocation in the
global arena.
In recent trading, the yield on the benchmark 10-year Treasury
note was 2.347%, according to Tradeweb, compared with 2.367%
Monday.
The yield has fallen from 2.451% at the end of January, set for
the first monthly slide in seven months. Yields fall as bond prices
rise.
On the last trading session of each month, newly minted bonds
replace maturing debt in some bond market indexes. Fund managers
who track these indexes replicate the move by buying bonds,
generating demand especially for longer-term bonds.
A revision of U.S. economic growth for the fourth quarter
trailed expectations, also contributing to the slide in yields.
The world's largest economy expanded at a rate of 1.9% during
October-December, the Commerce Department said Tuesday. That was
unchanged from the initially reported figure, but economists
surveyed by The Wall Street Journal had expected an upward revision
to a 2.1% growth rate.
In a speech to Congress after U.S. markets close, Mr. Trump is
expected to outline his policy priorities. Traders and analysts say
the key focus will be his updates on fiscal stimulus proposals,
highlighted by his call for lower taxes, large infrastructure
spending and less onerous financial regulation.
"The market is looking to at least see a continued commitment
with some optimistic tone in order to reallocate back into any
reflation trades," said Michael Lorizio, senior trader at Manulife
Asset Management. "The market wants specifics."
Investors have been grappling with conflicting signals on the
so-called reflation trades.
U.S. government bond prices have strengthened this year even as
the Dow Jones Industrial Average has soared by more than 1,000
points. This is a shift from late last year when bond prices sank
and stocks rallied, reflecting investors' optimism toward a
stronger economy and higher inflation driven by fiscal stimulus
expectations.
The 10-year Treasury yield has fallen from 2.6% in mid-December,
which was the highest since September 2014.
Analysts say yields may fall if Mr. Trump disappoints investors
looking for more details of his fiscal outlook.
"The bias is for higher rates, but we have seen this movie
before," said Kevin Giddis, head of fixed-income capital markets at
Raymond James. "In a world of expectations versus reality, reality
over the last couple of years has been good for bond prices."
Other factors also contributed to lower yields.
Political risk in Europe, especially the uncertainty surrounding
the presidential race in France, has stoked demand for haven bonds.
Wagers betting on higher bond yields, or shorts, have been pulling
back lately, a sign some of the bettors bought back bonds to tweak
their wagers.
Shorts fell to 20% for the week that ended Monday from 25% a
week ago, according to the weekly Treasury client survey from J.P.
Morgan Chase & Co. The share of those who expect lower yields,
or longs, rose to 18% from 16%. The gap between the two -- negative
2% -- represents the fewest net shorts since Nov. 7.
Another factor affecting the bond yield outlook is the timing
and pace of Federal Reserve interest-rate increases.
Bond yields rose Monday, reflecting some investors selling bonds
to hedge against the risk of a Fed rate increase in March.
Federal Reserve Bank of Dallas President Robert Kaplan, who
votes on interest rate decisions this year, said Tuesday he feels
it is better to raise those rates "sooner rather than later." He
was the latest official over the past few weeks signaling that a
rate increase in March isn't off the table.
Fed Chairwoman Janet Yellen is scheduled to speak Friday. One
key data point to shape market expectation over the timing of a
rate increase is the nonfarm jobs report due March 10.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
February 28, 2017 11:31 ET (16:31 GMT)
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