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Credit Markets: Treasury Yields Give Back Gains -- WSJ

19 May 2018 6:32 am
By Daniel Kruger 

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 (May 19, 2018).

U.S. government bond prices rose Friday, sending yields to their biggest one-day decline in six weeks.

The yield on the benchmark 10-year Treasury note fell to 3.067%, from 3.109% Thursday, while still closing out its sixth weekly gain in the past seven weeks. Yields fall as bond prices rise.

Yields fell after two antiestablishment parties poised to take power in Italy finalized a coalition agreement Friday that challenges the constraints of the euro, setting up a possible fight with European leaders. The upstart 5 Star Movement and the hard-right League are seeking to reboot one of Europe's most-troubled economies with a mix of euroskeptic economic policies and tens of billions in tax cuts and stimulus spending.

Yields rose earlier this week along with investors' inflation expectations. Analysts increasingly expect a pickup in inflation, even though it has been slow to materialize in the economic data. The yield on the 10-year Treasury note, which is more sensitive to inflation, closed Thursday at its highest level since July 2011. Inflation is a threat to the value of government bonds because it erodes the purchasing power of their future coupon payments.

The gap between shorter- and longer-term yields has widened as investors remain optimistic about the pace of U.S. growth. The difference between two- and 10-year yields increased to about 0.519 percentage point from 0.433 percentage point a week ago.

Investors often look at the spread between those yields as a barometer of the strength of the economy, with a steeper curve suggesting greater vitality.

The yield curve had flattened to about 0.4 percentage point, the smallest gap since 2007, as the government's increases in short-term debt sales put pressure on those yields to rise.

Next week's auctions "should help the flattening trade," said Aaron Kohli, an interest-rate strategist at BMO Capital Markets. The drop in longer term yields represents a "relief rally, given how much we've sold off," with investors taking advantage of relatively high interest rates.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

May 19, 2018 02:32 ET (06:32 GMT)

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