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Bond Yields Surge, Signaling Growth Hopes

Investors propelled bond yields to multiyear highs Wednesday as robust economic data and an easing of trade tensions across North America sparked fresh optimism about the global growth outlook

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Robust economic data and a reduction in trade tensions also sent stocks higher on the New York Stock Exchange Wednesday. Photo: bryan r. smith/Agence France-Presse/Getty Images

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By

Akane Otani

Oct. 3, 2018 5:42 p.m. ET

Investors propelled bond yields to multiyear highs Wednesday as robust economic data and an easing of trade tensions across North America sparked fresh optimism about the global growth outlook.

Wednesday’s bond rout sent the yield on the 10-year U.S. Treasury note, a closely watched barometer of investors’ sentiment toward growth and inflation, to its highest level since July 2011. Risky assets rallied, pushing the Dow Jones Industrial Average to a record and crude-oil prices to multiyear highs.

Together, the moves suggested investors are once again growing ebullient about future growth, a shift from the more cautious outlook that many held for much of the year.

Fractious negotiations and tariffs imposed between the U.S. and its trade partners had damped investors’ optimism about the global economy, keeping a lid on stock gains and Treasury yields. Investors also cited risks ranging from tumbling emerging markets to geopolitical tensions in the eurozone as reasons to stay cautious.

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Index performanceSource: Dow Jones Market Data

%Dow JonesIndustrialAverageS&P 500NasdaqCompositeJan. ’18MarchMayJulySept.-505101520

Yet many said the deal between the U.S. and Canada late Sunday to revise the North American Free Trade Agreement removed one source of anxiety for the markets, showing the White House was more amenable to negotiating with its trade partners than some had thought.

Adding to the upbeat mood, data Wednesday showed U.S. services-sector activity hit a record in September and private payrolls expanded far more than expected.

Investors expect more strong data Friday, when the Labor Department is scheduled to release its monthly employment report.

“Whether it’s job creation, unemployment, wage growth…just across the board on the various measures of growth, it’s strong,” said Dan Miller, director of equities at GW&K Investment Management.

Investors are cognizant that risks remain, particularly outside of the U.S. International Monetary Fund Managing Director Christine Lagarde warned Monday that the group’s official economic forecasts have “become less bright.”

Yet so far, many believe the U.S. is on strong enough footing to power on—a contrast to 2015, when investors had worried that signs of a slowdown in China were possibly a prelude to a U.S. recession.

Combined with investors’ hopes that the U.S. will ultimately reach a trade agreement with China, and “you can now look to 2019 with some greater confidence in both the growth of the economy, the growth in profits and the sustainability of those profits,” Mr. Miller said.

The S&P 500 rose 0.1% to 2925.51 Wednesday, while the Dow industrials added 0.2% to 26828.39, boosted by shares of banks and manufacturers. U.S. crude oil for November delivery jumped 1.6% to $76.41 a barrel, settling at its highest level since November 2014 and driving up inflation expectations.

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U.S. crude oilSource: SIX

.a gallonJan. ’18MarchMayJulySept.58.0060.0062.0064.0066.0068.0070.0072.0074.0076.00$78.00

Treasurys weakened as investors bet on stronger growth and inflation, which could spur a faster pace of interest-rate increases from the Federal Reserve. The yield on the benchmark 10-year U.S. Treasury note climbed to 3.159% from 3.056% Tuesday, settling at its highest level since July 2011 and notching its biggest one-day rise in more than a year. Yields rise as bond prices fall.

Yields on shorter-term debt also climbed, showing investors’ growing expectations for interest-rate increases. The yield on the two-year Treasury note, which is often sensitive to changes in expectations for Federal Reserve interest-rate policy, rose to a 2018 high of 2.860% from 2.815% Tuesday.

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Treasury yieldsSource: Ryan ALM

%10-year note2-year noteJan. ’18MarchMayJulySept.1.82.02.22.42.62.83.03.23.4

“We’ve seen the economy able to beat some pretty impressive expectations at every measure,” said Michael Lorizio, senior trader at Manulife Asset Management. That has helped drive up inflation expectations, as well as distill a higher degree of confidence that the Fed will be able to keep raising interest rates at its current slow but steady pace, Mr. Lorizio said.

So far, analysts have largely regarded the gradual uptick in inflation and interest rates as a testament to the strength of the U.S. economy, not as an imminent threat.

“There’s no reason to think that the probability of a recession in the next year or two is at all elevated,” Fed Chairman Jerome Powell said last week at a conference of business leaders.

Yet many remain wary, saying the Fed raising rates too quickly is the largest threat to the nine-year-old bull market in stocks.

The yield on the 10-year Treasury is used as a reference for everything from auto loans to mortgages. As borrowing costs continue to climb, some investors worry key areas of consumer spending will falter—something that could accelerate the end of the cycle.

Data already have shown some fault lines in the housing and auto sectors. Sales of existing homes fell in August for a sixth consecutive month, pressured by a combination of rising mortgages and a lack of inventory.

Major auto makers ranging from Ford Motor Co. to Nissan Motor Co. reported on Tuesday that U.S. sales slid in September.

Still, the strength of the broader economy has helped offset investors’ concerns about areas that have stumbled. And some believe that bond yields, which are now approaching the upper range of where many analysts had forecast they would end the year, may struggle to keep rising at their current pace.

Higher bond yields can draw buyers back into the market, especially with yields in other developed markets remaining relatively low.

“The [U.S.] data is broad, deep and sustainable,” Mr. Miller said, adding that he believes the economic cycle has shown it has plenty of room to run.

—Sam Goldfarb contributed to this article.

Appeared in the October 4, 2018, print edition as 'Bond Yields Hit Multiyear Highs.'

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