U.S. Government Bonds Retreat

By Min Zeng 

        U.S. Treasury bonds posted price losses on Monday for a third consecutive day, driven by a debt deal to keep Greece in the eurozone and continued rebound in China's stock markets.
        The yield on the 10-year Treasury note settled at 2.43% compared with 2.415% on Friday.
        It was the yield's highest closing level since June 26 when it closed at a nine-month peak of 2.48%. Yields rise as prices fall.
        As anxiety on Greece and China retreated, stocks in Europe and the U.S. rallied broadly, which dented demand for ultrasafe U.S. government debt. The price decline in the bond market was moderate, a sign many investors remain cautious. Any setback on Greece or China could jolt risk appetites again and boost demand for Treasury bonds.
        "It is a sigh of relief," said Andrew Milligan, head of global strategy at Standard Life Investments, which has $383.7 billion of assets under management. "But it is not going to be smooth sailing. We still face a lot of uncertainties."
        Mr. Milligan said he has been holding less Treasury debt compared with a benchmark index and is favoring stock markets, especially Japanese equities.
        Turmoil in Greece and China has gripped global investors in July, fueling swings in financial markets where volatility already has been on the rise as the Federal Reserve is prepared to raise benchmark short-term interest rates some time this year.
        Investors had piled into haven Treasury bonds in the early part of last week, sending the yield on the 10-year Treasury note below 2.2%. But as optimism grew on a deal for Greece and intervention from Chinese authorities has prevented the nation's stock market from tumbling, the yield has climbed over the past three sessions. The yield climbed to as high as 2.467% during Monday's trading.
        Eurozone leaders said Monday that they would give Greece up to EUR86 billion ($96 billion) in fresh bailout loans as long as the government of Prime Minister Alexis Tsipras manages to implement a round of punishing austerity measures in the coming days.
        The focus now shifts to Greece, whose Parliament has to pass pension overhauls and sales-tax increases that voters overwhelmingly rejected in a referendum just one week ago.
        "There was broad risk-on sentiment at the end of last week in anticipation of the Greek deal, and we are seeing follow-through," said Yacov Arnopolin, senior portfolio manager at Goldman Sachs Asset Management which has approximately $1.024 trillion of assets under supervision. "But there's a lot to nail down, including parliamentary approval this week."
        An easing debt crisis in Greece would shift investors' focus back to the Fed's plan for raising interest rates for the first time since 2006 as the U.S. economy has been strengthening after a soft patch during the first quarter.
        Treasury bond yields have risen over the past few months after a decline earlier this year as investors are worried that the Fed's shift in monetary policy would shrink the value of outstanding bonds.
        Bond prices sold off Friday as Fed Chairwoman Janet Yellen reiterated that the central bank is on track to raise short-term interest rates later this year, playing down the potential fallout from Greece and China on the U.S. growth outlook.
        Ms. Yellen is scheduled to testify before lawmakers on Wednesday and Thursday on monetary policy outlook.
        On Monday, the yield on the two-year Treasury note, among the most sensitive to changes in the Fed's rate policy outlook, rose to 0.669% from 0.653% on Friday. The yield is near this year's closing high of 0.733% made on June 10.
        Treasury bond yields remain very low from a historical standpoint. Many investors expect the 10-year yield to be capped below 3% this year as Fed officials have signaled the central bank would be gradual and slow once it starts raising rates.
        Tom di Galoma, head of rates and credit trading in New York at ED&F Man Capital Markets, said higher Treasury yields represent a buying opportunity and he expects strong buying interest should the 10-year yield rise to 2.5% or above.
        Goldman Sachs's Mr. Arnopolin said the Fed's move to raise interest rates "shouldn't necessarily prompt an exodus" out of emerging markets.
        "The Fed's plan has been well-telegraphed," he said. "While a rise in Treasury bond yields would put pressure on yields of local-currency emerging market bonds, higher yields in EM serve as a shock absorber."
        Write to Min Zeng at min.zeng@wsj.com
        (END) Dow Jones Newswires

        July 13, 2015 16:07 ET (20:07 GMT)

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