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Government Bonds Weaken as Inflation Fears Outweigh Trade Uncertainties

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03/07/2018 | 10:49pm CEST

By Gunjan Banerji

U.S. government bond prices slipped Wednesday, with investors weighing signs of health in the economy with uncertainty over trade policy.

The yield on the benchmark 10-year Treasury note rose to 2.883% from 2.877% on Tuesday. Yields rise as bond prices fall.

Yields gyrated between small gains and declines throughout the session, finishing higher after employers across the U.S. said wage growth rose this year, according to a Federal Reserve report, suggesting inflationary pressures. In many of the Fed's 12 regional districts, wage growth increased to a moderate pace, the central bank said in its latest beige book, a roundup of anecdotal information about the economy.

Inflation is a threat to the value of government bonds because it erodes the purchasing power of the securities' fixed payments and can push the Fed to raise interest rates.

Yields also rose earlier in the session after data showed that hiring at private U.S. employers ticked up more than expected in February, a pickup stemming from sectors across the economy, according to payroll processor Automatic Data Processing Inc. and forecasting firm Moody's Analytics. The report precedes the monthly Labor Department data, which investors will parse or information on the health of the economy.

"I look at the world at the moment as being bond-unfriendly," said James Athey, senior investment manager at Aberdeen Standard Investments.

Some analysts said concerns over a global trade war triggered yield declines early in the session after Gary Cohn said he would resign as President Donald Trump's top economic adviser, a move that roiled stock markets early Wednesday. Mr. Cohn was key to the White House tax overhaul but clashed with the president over steel and aluminum tariffs that faced backlash from countries around the world.

The yield on the 10-year Treasury slipped to as low as 2.846% in early trading, according to Tradeweb, as investors scooped up government bonds and sold riskier assets like stocks. Stocks pared losses later in the day.

The early-session weakness in stock prices drove a "commensurate rally in Treasurys," Mr. Athey said.

Some analysts said data showing a widening trade deficit could also feed a political back-and-forth over tariffs. The U.S. trade deficit widened in January for the fifth straight month, hitting its largest level in over nine years, the Commerce Department said Wednesday. Imports remained flat from December, but exports fell in January.

Write to Gunjan Banerji at [email protected]

Write to Gunjan Banerji at [email protected]

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