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Credit Markets: Safety Bid Boosts Treasurys, U.K. Gilts -- WSJ

19 Jul 2017 6:32 am
By Min Zeng 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 19, 2017).

Prices of government bonds on both sides of the Atlantic strengthened Tuesday, sending the yield on the benchmark U.S. 10-year Treasury note to the lowest level this month.

Demand for haven bonds got a boost after Senate Republicans failed to garner enough support to repeal and replace the Affordable Care Act. The latest setback on the health-care bill raised fresh concerns about President Donald Trump's ability to push through his fiscal agenda when data are showing tepid consumer spending and softening inflation.

U.S. Treasury-bond yields rose sharply late last year, driven by expectations that large fiscal stimulus would lead to stronger growth and higher inflation, factors that would cause the value of haven bonds to fall. But the so-called reflation trade, or the Trump trade, via higher bond-yield wagers has pulled back this year.

"Treasury-bond yields will fall as Trump's domestic agenda looks to be in jeopardy," said Tom di Galoma, managing director at Seaport Global Holdings. "With no new domestic agenda adding to economic growth, it will be very difficult to create new inflation."

The yield on the benchmark 10-year Treasury note settled at 2.263% on Tuesday, compared with 2.309% Monday. It marked the yield's lowest close since June 28. Yields fall as bond prices rise. The 10-year yield jumped to 2.393% on July 7 from this year's low of 2.135% on June 26.

Bond yields have fallen over the past week after a recent selloff, supporting some money managers' belief that a rise in bond yields wouldn't last for long without clear signs of accelerated economic growth or inflation.

An unexpected slowdown in the U.K.'s inflation contributed to Tuesday's slides in bond yields. A report showed annual consumer-price gains in the U.K. slowed to 2.6% in June from 2.9% in May. The release reduced some anxieties that the Bank of England might soon follow the Federal Reserve to tighten monetary policy, sending U.K. government-bond yields lower. Lower U.K. yields rippled into the U.S. market, highlighting the tight linkage of global bond markets.

The yield on the 10-year U.K. gilt fell to 1.222% Tuesday from 1.271% Monday, according to Tradeweb.

Some analysts say the global government-bond market remains vulnerable to potential shifts in central banks' monetary-policy outlook. Worries that the European Central Bank would taper its bond buying have been a key factor boosting bond yields recently.

The ECB's policy meeting is scheduled for Thursday, followed by the Fed's two-day meeting next week.

Readings of consumer prices have been softening over the past few months, which means the Fed would go slow in normalizing interest-rate policy, some investors said.

Last Friday's report showed the consumer-price index rose by an annualized 1.6% over the past 12 months through June, the smallest gain since October 2016. The reading is below the Fed's 2% target.

"The bond market is starting to anticipate that the Fed will be forced to acknowledge weak inflation is no longer transitory, and thus the rate-hike cycle could get put on hold," said Anthony Cronin, a Treasury bond trader at Société Générale SA.

Federal-funds futures, a popular derivative market for investors to place bets on the Fed's rate-policy outlook, on Tuesday showed 47% odds that the Fed would raise rates by its December meeting, according to CME Group. The odds were 54% a week ago.

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

(END) Dow Jones Newswires

July 19, 2017 02:32 ET (06:32 GMT)

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