US long bonds weaken on inflation fear, election uncertainty

Longer-dated US Treasury prices fell on Thursday after the Bank of England indicated that inflation is likely to rise further, while uncertainty over next week's US Presidential election propped up shorter-dated debt. The Bank of England ramped up its forecasts for growth and predicted that inflation would jump to 2.7 percent this time next year, nearly triple its current level.
"We are responding to the bearishness of the Bank of England statement," said Tom Tucci, head of Treasuries trading at CIBC in New York. Bonds globally were roiled last month as investors worried that inflation would pick up and that central banks would become less accommodating. Central bank bond purchases programs have been a large factor underpinning demand for longer-dated bonds.
Uncertainty heading into next week's US Presidential election gave support to the front-end of the market as investors sought out the safety of short-dated assets. "There is a lot of cash and a lot of uncertainty. It's helping the yield curve steepen because people are just parking money up front," said Tucci. Benchmark 10-year notes ended down 5/32 in price to yield 1.82 percent, up from 1.80 percent late on Wednesday. The yield curve between five-year notes and 30-year bonds steepened to 134 basis points on Thursday, the steepest since June 27. The curve between two-year notes and 10-year notes also steepened to as much as 101 basis points, the largest yield gap since May 12.
The next major economic focus for investors will be Friday's payrolls report for October, which is expected to show employers added 175,000 jobs, according to the median estimate of 106 economists polled by Reuters. Data on Thursday showed US services industry activity cooled in October amid a slowdown in new orders and hiring, suggesting a moderation in economic growth early in the fourth quarter. Other data on Thursday showed planned job cuts by US-based employers dropped 31 percent to a five-month low last month. That underscored the labor market's healthy fundamentals, though more Americans filed for unemployment benefits last week.