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Treasury Yields Climb as Focus Turns to French Election

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04/20/2017 | 10:06pm CET
By Sam Goldfarb 

U.S. government bonds pulled back Thursday, retreating for the second day in a row after an extended rally had pushed the yield on the 10-year note to a five-month low.

The yield on the benchmark 10-year note settled at 2.239%, compared with 2.202% Wednesday and 2.177% Tuesday, its lowest close since Nov. 10. Yields rise as bond prices fall.

Analysts attributed the price declines to a few different factors, including heavy debt issuance in Europe and better poll numbers for the centrist French presidential candidate Emmanuel Macron ahead of Sunday's first-round vote, which will determine the two candidates who make it to the election's final round on May 7.

Uncertainty around the French election has been one reason why Treasury yields have declined recently, as investors have sold French bonds and migrated to the safety of German and U.S. government debt.

A month ago, investors were fairly confident that French voters would elect Mr. Macron as president, but that assumption has been challenged more recently by a surge in support for the far-left candidate Jean-Luc Mélenchon. The contest is now considered a close four-way race that also features the far-right Marine Le Pen and conservative François Fillon.

For many investors, the worst-case scenario would be a second round contest pitting Ms. Le Pen against Mr. Mélenchon as both candidates have discussed the possibility of France leaving the European Union, an outcome that could threaten the eurozone and destabilize financial markets.

Though polls suggest both Mr. Macron and Mr. Fillon would defeat Ms. Le Pen in a second round, they point to a possible victory for Mr. Mélenchon if he faces off against Mr. Fillon.

"I think what we're looking at largely here today is just a waiting game, " said John Canavan, market analyst at Stone and McCarthy Research Associates in Princeton, N.J.

If Mr. Macron emerges the clear winner in the first round, "a relief trade" would likely drive Treasury yields higher but could be short-lived as investors move on to other issues, he added.

Along with the French election, investors have grown concerned lately about escalating tensions between the U.S. and North Korea and less optimistic that President Donald Trump will be able to pass fiscal stimulus measures that could provide a boost to growth and inflation. Recent U.S. economic data have also been mixed, making investors more skeptical that the Fed will raise interest rates again before the end of the second quarter.

Higher interest rates and inflation both diminish the value of outstanding government bonds.

Treasury yields ticked higher in the afternoon after Treasury Secretary Steven Mnuchin said the administration was "pretty close" to releasing a plan to overhaul the tax code. But they quickly fell back to previous levels as bond investors maintained a wait-and-see approach to the administration's proposals.

Write to Sam Goldfarb at [email protected]

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