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U.S. Government Bond Yields Rise With Stocks

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03/05/2018 | 09:57pm CEST

By Akane Otani

U.S. government bond prices slipped Monday as stocks rebounded from their early morning losses.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.879%, compared with 2.855% Friday. Yields rise as bond prices fall.

Yields on the 10-year note initially fell overnight as investors sought the safety of so-called haven assets following national elections in Italy and continued threats from the White House over U.S. trade policy. Treasury yields then moved higher as U.S. stocks reversed course later in the session.

The economic and earnings outlook looks solid, investors say, helping support continued appetite for risky assets even as worries about political tensions remain.

Over the weekend, Italy's elections yielded no outright winner but showed populist parties winning enough support to earn the right to try to form a government.

Meanwhile, fresh comments from the White House on trade policy kept some investors on edge, with President Donald Trump saying on Twitter that he would only lift planned tariffs on steel and aluminum imports if Mexico and Canada agree to sign a "new & fair NAFTA agreement."

Mexico and Canada are the U.S.'s top two trading partners, and officials from both countries have said the tariffs would be unacceptable. The back-and-forth between the U.S. and other countries has raised concerns among investors that the U.S. could face broader repercussions that could hurt economic growth, including levies on other products and commodities.

While those fears could help lift demand for haven assets in the short term, analysts say Treasurys could come under pressure if the tariffs stoke inflation -- considered a main threat to government bonds, since it chips away at the purchasing power of their fixed returns.

"It is clear that the tariffs will tend to raise prices, at least for producers, but likely also drive some price rise pass-through for consumers," said Morgan Stanley strategist Guneet Dhingra in a note.

At the same time, the impact of any imposed tariffs on inflation could ultimately be softened, Mr. Dhingra said, if higher commodity prices lead to consumers spending less, or if countries affected by the tariffs turn to exporting substitute goods as opposed to raw steel.

Later this week, bond analysts will be looking to data on hiring in the U.S. private sector, comments from the European Central Bank and the U.S. monthly employment report, which should offer investors another look at whether recent signs of a pickup in wage growth point to a broader trend, as opposed to one-off gains in January.

Recent data on wage growth and consumer spending have suggested long-dormant inflation could finally be firming, lifting yields on the 10-year note higher since the start of the year.

Still, some investors and analysts have remained skeptical that inflation is picking up at a pace that would push the Federal Reserve to accelerate its pace of interest-rate increases.

Investors "need more hot data to keep the inflation scare alive," said Christopher Rupkey, chief financial economist at financial firm MUFG.

Write to Akane Otani at [email protected]

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