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Brightening U.S. Prospects Send Government Bond Yields Higher

04/29/2021 | 03:31pm

By Anna Hirtenstein

Government bond yields climbed world-wide after signs of accelerating U.S. economic growth prompted worries that inflation will rise more rapidly than expected.

The yield on the benchmark 10-year U.S. Treasury note, which rises as bond prices fall, touched 1.688%, its highest intraday level in more than two weeks, before settling at 1.639%. European sovereign bond yields also climbed, with the yield on the 10-year German bund rising to minus 0.188%, according to Tradeweb, the highest since March 2020.

European sovereign bond yields also climbed, with the yield on the 10-year German bund rising to minus 0.178%, the highest since March 2020.

Much of the climb came after data showed that the U.S. economy expanded 6.4% on an annualized basis in the first quarter, leaving the world's largest economy within 1% of its late 2019 peak. Households, boosted by recent stimulus efforts, ramped up spending on everything from cars to furniture.

Investors tend to sell government bonds when they expect growth and inflation, which erodes the purchasing power of bonds' fixed payments and can spur the Federal Reserve to raise interest rates. Yields have climbed steadily this year, reaching nearly 1.75% at the end of the first quarter from around 0.9% at the close of 2020, lifted by expectations for reopenings and stimulus to fuel a surge in growth.

President Biden's Wednesday night proposal for another round of fiscal stimulus spending, which could total $1.8 trillion, also weighed on the bond market.

"The fiscal stimulus has been the single more important factor for the bond market this year. It's delivered a huge boost to growth and really changed perception of where the U.S. economy is going, where the Treasury market is going," said Seamus Mac Gorain, head of global rates at J.P. Morgan Asset Management. It remains to be seen if the latest proposed package gets passed by Congress, but it would be another contributor to growth, he said.

Some observers have spent months debating whether that acceleration will prompt the Fed to pare easy-money policies more quickly than expected. The 10-year yield on Thursday pared an early climb to finish little changed after Fed Chairman Jerome Powell said the economy remains a long way from the central bank's goals and officials would need to see substantial further progress before reducing support for the economy.

"The bond market is trying to draw inferences around when we can expect the tapering debate to be meaningful. It's looking increasingly likely by June," said Chris Jeffery, head of rates and inflation strategy at Legal & General Investment Management. "The Fed has repeatedly said they need to see some substantial progress. I think we should expect to see this imminently."

The improving U.S. outlook also has lifted European government bond yields, challenging the region, which hasn't recovered as strongly. Several major economies, including Germany and France, remain in lockdowns, although vaccination rollouts are speeding up.

The European Central Bank has said that it is seeking to preserve favorable financing conditions and ramped up the pace of bond purchases last month to temper the rise in yields. Despite this, an April 20 bank lending survey showed that credit conditions tightened for a third consecutive quarter for businesses, and lenders said they expect this to continue.

"At this point it's very clear that the ECB doesn't have the situation of European sovereign yields under control," said Althea Spinozzi, a fixed-income strategist at Saxo Bank. "I would expect, depending on the severity of the selloff, that we could expect an increase of purchases."

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com

(END) Dow Jones Newswires

04-29-21 1731ET

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