Yields on longer-term U.S. Treasurys rose at the fastest pace in nearly three years, a sharp reversal from the start of the month when their rapid descent toward all-time lows stoked concern on the economic outlook.
The yield on the benchmark 10-year U.S. note settled Thursday at 1.789%. That was up from 1.733% on Wednesday and a recent low of 1.456% on Sept. 4, marking the largest six-session increase since just after the U.S. election in 2016. Some investors and analysts said the recent upturn in yields, which rise when bond prices fall, can be largely attributed to profit-taking from traders who rode a furious bond rally throughout the month of August. Yet some positive economic developments have contributed to the selling. Though a global downturn in manufacturing remains a top concern, investors have been encouraged recently by evidence of strength in other parts of the economy, as well as tentative signs that inflation could be accelerating.
The European Central Bank cut its key interest rate and committed to a prolonged period of monetary stimulus.
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On top of that, many investors have switched from being extremely pessimistic about a U.S.-China trade deal to cautiously optimistic as the two sides prepare for a new round of talks in October. “Profit-taking has been the story for at least a good portion of the selloff,” said Michael Lorizio, a senior trader at Manulife. Decent economic data, though, has helped, indicating the economy may be on more solid footing than investors had feared, he added. Investors tend to shift money to riskier assets when they are feeling better about the economy. The prospect of higher inflation also weighs on bonds because inflation erodes the purchasing power of their fixed returns. On Thursday, yields on government bonds on both sides of the Atlantic initially fell after the European Central Bank cut its key interest rate and committed to a prolonged period of monetary stimulus. In a statement, the ECB said it would cut its key interest rate by 0.1 percentage point, to minus 0.5%, and start buying €20 billion ($22 billion) a month of eurozone debt. The asset-purchase program is expected to “run for as long as necessary” and only end shortly before the bank starts raising interest rates, the ECB said. Though the ECB was expected to reintroduce monetary stimulus, analysts said the central bank’s promise to continue easy-money policies was powerful enough to increase demand for bonds, particularly from eurozone countries with higher-yielding debt. A wave of buying pushed the 10-year Treasury yield as low as 1.670%, according to Tradeweb. It quickly, though, reversed course after news reports suggested that both the U.S. and China were seeking ways to narrow their differences on trade. Despite the selling in recent days, the yield on the 10-year note remains close to its all-time closing low of 1.366%, creating a favorable environment for borrowers. To that end, this week has shaped up to be a busy one for sales of new speculative-grade corporate bonds. As of Wednesday, some $11.8 billion of new speculative-grade corporate bonds were expected to be sold by the end of the week, the second largest one-week total of 2019, according to LCD, a unit of S&P Global Market Intelligence. That total was set to rise, as Uber Technologies Inc. on Thursday was poised to sell $1.2 billion of new eight-year notes, marking its first bond sale since its May initial public offering. The company was set to sell the bonds with a 7.5% yield after increasing the size of the offering from $750 million, an investor said. Uber’s existing 8% notes due in 2026, which were marketed and sold to a limited group of investors last year, recently traded at 104 cents on the dollar for a yield of 7.053%, according to MarketAxess. That was unchanged from Wednesday. Write to Sam Goldfarb at firstname.lastname@example.org
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