Treasuries Fall as New Corporate Debt Follows Japan Bond Selloff

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(Bloomberg) -- Treasuries fell as US trading returned to normal after last week’s holiday, with a surge of new corporate bond supply to begin the last month of the year.

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Yields rose to session highs during US morning — led by long-maturity tenors — after Merck & Co. slated an eight-part bond offering that includes 20-, 30- and 40-year tranches. Government bonds globally were already under pressure as Japan’s 10-year yield jumped to the highest level since 2008 on the prospect of a Bank of Japan interest-rate hike later this month.

The US 10-year yield rose as much as seven basis points to 4.09%, while shorter maturities were higher by at least four basis points. Merck’s offering and about six others — the first new investment-grade corporate bonds in a week — kick off an anticipated $40 billion month, about half of which is expected this week. Robust market conditions allowed $1.55 trillion of supply this year through November.

Japan’s two-year borrowing costs — among the most sensitive to changes in monetary policy — climbed above 1% for the first time in 17 years. The move was fueled by BOJ Governor Kazuo Ueda talking up the prospects for a rate hike, leading money markets to lift the chance of a move on Dec. 19 to around 80%, from less than 25% one week ago.

Traders in US debt remain sensitive to BOJ policy given its control of the spigot on the flow of Japanese yen liquidity globally. Higher rates in Japan may entice domestic investors to keep more funds in local government bonds, instead of higher-yielding assets overseas such as Treasuries.

US yields are gyrating around 4% on the prospect for rate cuts by the Federal Reserve, having dropped below that level last week after Fed Bank of New York President John Williams said he saw room for a near-term cut.

Traders are assigning an 80% probability on the Fed lowering benchmark rates next week for a third time this year, after President Donald Trump said Sunday he had made his choice on who will next lead the central bank. That reflects the likelihood he will announce White House National Economic Council Director Kevin Hassett, who has emerged as the frontrunner to be Jerome Powell’s replacement.

Investors will also be closely watching the ISM’s manufacturing data for November later in the day for clues on the outlook for US monetary policy. Economists forecast a a small improvement in the headline number and a drop in the prices paid component, according to a Bloomberg poll.

“This may be enough to validate the bearish pressures we are seeing now,” said Evelyne Gomez-Liechti, a strategist at Mizuho International Plc.

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