Treasurys Hold Steady As Investors Assess Tax Legislation

12/05/17 11:59 AM EST
By Sam Goldfarb 

U.S. government bonds were little changed Tuesday as a broad gauge of U.S. economic activity fell below expectations in November while investors continued to assess the implications of a fast-moving tax overhaul bill.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.381%, according to Tradeweb, compared with 2.379% Monday.

Yields, which fall when bond prices rise, held steady after the Institute for Supply Management said its nonmanufacturing index rose to 57.4 in November, down from 60.1 in October and below the 59.0 reading anticipated by economists surveyed by The Wall Street Journal. A reading above 50 indicates activity is expanding across service and other industries, while a number below 50 signals contraction.

Treasurys tend to strengthen on disappointing economic data, as faster economic growth can spur inflation, which chips away at the fixed returns of government bonds.

Meanwhile, bond investors remained cautious about the potential impact of the tax cuts being assembled in Congress.

Last week, the 10-year yield initially climbed when it seemed that Senate Republicans had enough votes to pass a bill that would reduce federal revenue by about $1.4 trillion over the next 10 years.

Legislation that expands the federal budget deficit should generally put upward pressure on bond yields in part because it would force the government to issue more debt, which would weigh on the prices of existing bonds. Tax cuts could also spur some economic growth and inflation, providing another blow to Treasurys.

Still, longer-term Treasury yields were unable to sustain their gains even after the Senate passed the legislation on Saturday. Instead, the 10-year yield has leveled off while short-term bond yields have continued to climb higher, in what is known on Wall Street as a flattening yield curve.

"You can see additional flattening as being a reaction to the bill as it actually makes its way through the conference committee more so necessarily than higher rates across the curve," said Jim Vogel, interest-rates strategist at FTN Financial.

One reason, he said, is that investors are skeptical that tax cuts could spur much economic growth and inflation but confident that the Federal Reserve would respond to a short-term economic boost by raising interest rates.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

 

(END) Dow Jones Newswires

December 05, 2017 11:59 ET (16:59 GMT)

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