U.S. Government Bonds Fall, as Corporate Sales Compete

By Min Zeng 

U.S. government bond prices fell on Tuesday for a second straight session, hurt by booming corporate bond sales.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.098%, compared with 2.083% Monday, according to Tradeweb. Yields rise as bond prices fall.

The Treasury bond market has been off to a rough start in March after the biggest monthly selloff in February since June 2013, driven by continued anxiety over the Federal Reserve's interest-rate outlook.

Companies are tapping a still-low rate environment to sell new bonds aiming to lock in favorable terms in financing. Investment-grade firms are selling bonds in the U.S. at the fastest pace since 2009 so far this year, according to Dealogic.

Tuesday's highlight is Pharmaceutical company Actavis PLC, which sold $21 billion in bonds during early morning session. The bond sale ranks behind only Verizon Communications Inc.'s $49 billion bond sale in September 2013, according to Dealogic. Exxon Mobil Corp also plans to sell bonds later Tuesday, traders said.

Companies planning new debt sales tend to sell Treasury bonds to hedge against unwanted swings in interest rates, which underscores the U.S. government bond market's important role in global financing. Treasury bond yields are the benchmark to set borrowing costs for companies to raise capital and for U.S. consumers to refinance home loans and credit-card debt.

"Supply is the biggest factor right now weighing down the Treasury bond market," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.

Demand for corporate bond sales has been strong this year as buyers were attracted by higher yields than those offered by comparable Treasury bonds.

Daniel Mulholland, senior U.S. Treasury trader at Crédit Agricole in New York, said investors and bond dealers "are making room to buy this new supply by selling Treasury bonds."

Traders said companies will unwind the hedges once they price the new bond sales. In this case, they will buy back Treasury bonds. Such hedging activities linked to corporate bond sales will contribute to swings in Treasury bond prices, traders said.

Another focus this week for bond investors is the nonfarm jobs report due Friday, the key U.S. data point before the Fed's next interest-rate policy meeting on March 17-18.

Economists polled by The Wall Street Journal expect 240,000 new jobs have been added last month, after a 257,000 net increase in January. The unemployment rate is forecast to have fallen to 5.6% from 5.7% in January. The average hourly earning, a main gauge of wage inflation, is expected to have posted a 0.2% gain after a rise of 0.5% in January.

Concerns about the Fed potentially raising rates in June rattled the Treasury market last month. The 10-year note's yield increased by about 0.32 percentage point last month after falling nearly half of a percentage point in January.

Fed Chairwoman Janet Yellen said last week that the timing hinges on how the economy performs going forward.

A strong jobs report increases the odds that the Fed may remove the word "patience" in the March meeting, potentially raising interest rates in June, a case that could push up bond yields, traders said.

Many investors don't expect U.S. bond yields to jump significantly, as they are attractive compared with ultralow yields investors can get in other high-grade government bond markets around the world.

A number of government bonds in Europe have been trading at negative yields in recent months. The European Central Bank will start buying bonds this month and the buying binge in the coming months from the European Central Bank will leave fewer bonds available for investors to buy.

The 10-year Treasury yield was 2.173% at the end of 2014 and 3.03% at the end of 2013.

Write to Min Zeng at [e-mail]

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