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U.S. Government Bonds Settle Lower as Doubts About U.S. Tax Plan Surface

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11/09/2017 | 10:06pm CET
By Daniel Kruger 

U.S. government bonds settled lower after forecasts for European growth improved while the Republican tax overhaul plan encountered potential obstacles.

The yield on the benchmark Treasury 10-year note rose for a second consecutive day to 2.333%, from 2.325% Wednesday. Bonds yields rise as prices fall.

Bonds trimmed early losses after Republican aides said a Senate tax plan would delay cuts to corporate taxes until 2019, one year later than the House of Representatives' proposal and later than the Trump administration had hoped for.

"If you were to delay some of that stimulus, you could see a drag on jobs," said Dan Mulholland, a bond trader at Crédit Agricole. The uncertainty about that impact on the economy could "dampen the trajectory" on expectations for future Federal Reserve rate increases.

Earlier, Treasurys fell after the European Commission revised previous growth forecasts for euro-area economies, boosting its projection for economic output this year to 2.2% and by 2.1% in 2018, versus expectations for a 1.7% increase this year and 1.8% next year. That led investors to sell European government debt, with Treasurys falling in concert.

The market's uncertainty comes as it prepares for a leadership transition at the Fed. While Fed governor Jerome Powell, President Donald Trump's pick to replace Chairwoman Janet Yellen, is seen as a continuation of the status quo, that will remain "speculation" until the market sees how he responds to material changes in market expectations for the path of growth and inflation, Mr. Mulholland said.

The Treasury also sold $15 billion of 30-year bonds Thursday, after selling three-year notes on Tuesday and 10-year debt on Wednesday. The additional longer-term securities move may blunt some of the momentum that has built toward a flattening of the yield curve.

While the 10-year Treasury yield has fallen in the past two weeks from a recent high of 2.452%, shorter-term yields have been pushed higher as investors expect the Fed to continue lifting interest rates at least through next year.

"We've had a huge flattening trade," said Larry Milstein, head of Treasury trading at R.W. Pressprich & Co. "A little bit of a reversal that's supply driven makes sense."

Write to Daniel Kruger at [email protected]

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