By Min Zeng
A fresh slump in U.S. government-bond yields underscores growing
concern among investors that the U.S. economy is losing momentum
following last year's summer surge.
The yield on the benchmark 10-year Treasury note fell to 1.866%
Wednesday, a nearly two-month low, after reports showed that jobs
growth in the U.S. private sector slowed last month and
manufacturing activity pulled back.
That compares with 1.93% on Tuesday and 2.173% at the end of
2014. When bond prices rise, their yields fall.
For the most part, soft growth in China, Europe and Japan has
been the main economic worry over the past year, a period mostly
characterized by solid U.S. data and low interest rates that make
government bonds attractive.
But over the past month, a slate of disappointing U.S. economic
reports, spanning areas from retail sales to business investment to
housing, have pushed up bond prices amid fears that the U.S.
economy too could be slowing.
Accordingly, investors will be looking ever more closely at
coming data releases, notably the March nonfarm payrolls report due
Friday and the first estimate of U.S. gross domestic product due on
April 29.
How the U.S. economy fares holds the key to when the Federal
Reserve will start raising interest rates. The Fed has signaled it
plans to raise short-term rates for the first time since 2006, yet
officials are still split on whether the first move should come in
June or later.
The pullback in U.S. data is starting to sound familiar to some
investors, following promising starts in multiple years since the
financial crisis that ended with tepid growth. The U.S. economy
grew at a 5% clip in the third quarter of 2014 before slowing to
2.2% in the fourth, the government said last week.
"It is like every time when the Fed tries to raise interest
rates, there is a disappointing release that tells them to be
patient," said Mark MacQueen, co-founder and portfolio manager in
Austin, Texas, at Sage Advisory Services Ltd., which oversees $11
billion in assets.
The prospect of stronger growth and higher interest rates in the
U.S. has prompted investors to buy the U.S. dollar and sell other
currencies. The stronger dollar has played a role in slowing growth
by making U.S. exports less competitive overseas.
Many economists said the U.S. economy is in a temporary soft
patch, just like what happened last year amid harsh winter weather.
They still expect the U.S. economy to pick up speed in coming
months, a view echoed by many Fed officials.
Federal Reserve Bank of Atlanta President Dennis Lockhart, who
votes on interest-rate decisions this year, said Wednesday that he
believes the U.S. economy will pick up in the second quarter, and
the June-to-September window remains "quite feasible" for a rate
increase.
The nonfarm payrolls report for March, due Friday, is the key
data point to shape up investors' expectations on the timing of a
rate increase. Economists polled by The Wall Street Journal expect
the U.S. economy to have added 248,000 new jobs in March, after a
net gain of 295,000 in February.
Many investors are not convinced that the Fed will tighten this
summer.
Federal-funds futures, used by investors and traders to place
bets on central-bank policy, showed Wednesday that bettors see a 6%
likelihood of a rate increase in June, according to data from CME
Group.
"If things turn up in the next few months, we could still see a
September tightening," said Jack Flaherty, portfolio manager at
money manager GAM which has over $124 billion in global assets
under management. "If not, then we could see the timing pushed off
further."
Mr. Flaherty said he has bought Treasury bonds in recent weeks
given the uncertain growth outlook, adding that U.S. bond yields
remain attractive compared with other countries.
On Wednesday, the yield on the 10-year German government bond
closed at a record low of 0.17%. Japan's 10-year government bond
yielded 0.377% and the 10-year government bond in the U.K. yielded
1.55%.
Justin Lederer, senior trader of interest rates at Cantor
Fitzgerald LP in New York, said the 10-year German government bond
yield potentially could fall below zero, which he said would limit
any rise in comparable U.S. rates.
"I wouldn't be surprised for U.S. rates to go higher, but I
don't see 3% until at least 2016," he said.
Write to Min Zeng at min.zeng@wsj.com
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