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Credit Markets: Yield on 10-Year Treasury Edges Up -- WSJ

21 Jan 2017 7:32 am
By Sam Goldfarb 

U.S. government bonds pared earlier losses Friday after Donald Trump was sworn in as president and struck a populist tone in his inauguration speech.

Heading into the inauguration, some analysts warned that Mr. Trump could accelerate a recent bond selloff by speaking in broad terms about his plans to help the economy through the rollback of regulations and expansionary fiscal policies. Instead, his remarks had the opposite effect, dampening the selloff by drawing attention to his more protectionist views on trade policy, which investors fear could harm the economy.

"There was a lot of buildup and expectation that if Trump is going to launch an aggressive push in the first 100 days that there would be a flavor of that in the address, and there wasn't," said Jim Vogel, interest-rates strategist at FTN Financial.

"The investment community," he added, "tends to embrace globalization far more than" Mr. Trump's intended audience.

The market's reaction was still modest. The yield on the 10-year Treasury note settled at 2.466%, down from 2.500% just before Mr. Trump's speech, but above its 2.461% close Thursday and its 2.380% close last Friday.

Yields fall when bond prices rise.

Before the inauguration, bond prices had dropped sharply over two days as politics took a back seat to comments from Federal Reserve officials and economic data that suggested the central bank could raise interest rates at a faster pace than many investors had expected.

Data released Wednesday showed the consumer-price index increased 2.1% in December from a year earlier, the largest year-over-year rise since June 2014. Over time, inflation hits the value of bond investments by reducing the purchasing power of fixed principal and interest payments.

Later Wednesday, Fed Chairwoman Janet Yellen signaled interest rates could be raised "a few times a year" through 2019 and warned of the negative consequences of tightening monetary policy too slowly with inflation rising and the labor market near full employment.

Ms. Yellen's comments helped end a rally that had started in mid-December, when the 10-year yield reached 2.6%, and which itself had followed a much larger postelection selloff.

Several policies endorsed by Mr. Trump, including large tax cuts and increased spending on infrastructure, would likely diminish the value of outstanding government debt by adding to the supply of bonds and providing a boost to growth and inflation.

Not all investors are convinced of Mr. Trump's ability to stimulate growth. Still, some analysts caution the economy is already strong enough to justify higher bond yields without the help of fiscal policy.

"Bond markets around the world are making an adjustment to the reality that growth is looking healthier than previously estimated," said Anthony Karydakis, chief economic strategist at Miller Tabak.

Even if fiscal policies fall short of expectations, the bond market must contend with a healthier economy that is leading to higher inflation and consistent commentary from Fed officials pointing to higher interest rates, he said.

There are signs that investors still don't believe that the Fed will raise rates as quickly as it signaled last December, when it projected three rate increases during 2017.

Fed-funds futures, which are used to place bets on central bank policy, showed Friday that investors and traders saw a 71% likelihood that the Fed will raise rates twice, or half a percentage point, by its December meeting, but only a 38% chance that it will raise rates at least three times, according to CME Group.

The Fed forecast four rate increases for 2016 at their December 2015 meeting, but ended up only raising rates once as inflation remained muted and it confronted repeated bouts of instability in the financial markets.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

January 21, 2017 02:32 ET (07:32 GMT)

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