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

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11/10/2017 | 10:29pm CET
By Akane Otani 

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

The yield on the benchmark 10-year U.S. Treasury note settled at 2.397%, compared with 2.333% Thursday and 2.343% at the end of last week. It was the biggest one-day rise in yields since September.

The 10-year yield, which rises as bond prices fall, has advanced for three consecutive sessions, something that 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 climb higher, 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.

Others said the week's moves seemed to be driven by investors paring bets on bonds, after the yield on the 10-year Treasury note on Nov. 3 notched its largest one-week decline since mid-October.

"People just decided to take some chips off the table," said Tom di Galoma, managing director of rates trading at Seaport Global Securities, who added that he does not believe yields on the 10-year note will rise much higher than 2.500%.

One factor that could cap a rise in yields: the 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.

Inflation has been tepid in the U.S., and domestic economic growth has been steady but unspectacular, Mr. Galoma said, making it unlikely investors will rush to dump U.S. government bonds anytime soon

Write to Akane Otani at [email protected]

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