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U.S. Government Bonds Slip as Investors Focus on Tax Bill

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11/10/2017 | 05:18pm CET
By Akane Otani 

U.S. government bonds pulled back Friday, heading toward a weekly loss, as investors maintained their focus on the debate in Washington over a tax overhaul.

The yield on the benchmark 10-year U.S. Treasury note was recently at 2.381%, according to Tradeweb, compared with 2.333% Thursday and 2.343% at the end of last week. Yields rise as bond prices fall.

Treasury yields are on track for their third consecutive day of advances, which has surprised some analysts, given U.S. stocks on Thursday narrowly missed posting their biggest one-day loss in months after Senate Republicans proposed delaying corporate tax cuts until 2019.

To some investors, the proposal, which broke significantly from a House Republican plan introduced last week, raised questions over whether lawmakers would be able to reach an agreement on an overhaul they say will cut taxes by about $1.5 trillion over a decade.

Yet bond yields have continued to rise, which some say reflects ongoing concern that a tax overhaul -- whether it ultimately takes the shape of the House or the Senate proposal -- would expand the budget deficit. When deficits expand, the government responds by issuing more bonds, which can dilute the value of existing debt.

"What the bond market is likely responding to is the fact that there's no answer for the budget deficit in either one of these plans," said Kevin Giddis, head of fixed income capital markets at Raymond James.

A tax cut could also spur economic growth and inflation, which threatens government bonds by chipping away at the purchasing power of their fixed payments.

Still, prospects of a tax bill reaching the White House remain uncertain. House and Senate Republicans are contending with disagreements over a number of provisions, including the timing of a corporate tax cut, changes to the estate tax and the number of individual tax brackets.

That has led some analysts to say they favor buying Treasurys if the pullback deepens.

"Even if we were not already pessimistic about the prospects of the bill passing, we're pessimistic of its overall ability to propel GDP durably higher," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a note Friday.

Write to Akane Otani at [email protected]

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