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Jul 25, 2018

Markets I The Wall Street Journal

The Wall Street Journal.
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Good morning. I'm Ben Eisen with your market update on this busy Wednesday.
The earnings onslaught continues, with Facebook being the key name to watch after the close. We're keeping an eye on bitcoin after a recent rally, and we could get some trade news today.
Today, bond market reporter Daniel Kruger takes a look at how an aging population is keeping long-term rates low.
 

Markets in a Minute

Markets Data
 

Overnight Developments

  • Global markets struggled for direction Wednesday on another day in which trade relations are set to take center stage with European Commission President Jean-Claude Juncker’s visit to the White House.
  • Read our full market wrap here
 

Trading a Demographic Shift

By Daniel Kruger, bond market reporter
Treasury market watchers believe shifting demographics are a key factor set to keep long-term yields low, counteracting other forces that recently pushed the 10-year yield near 3%, such as a strengthening economy and increased government debt sales.
BNP Paribas bond analyst Timothy High contends the aging population is the biggest factor influencing whether investors buy 30-year Treasury bonds. Pension plans, which have seen their equity holdings rise in value as the bull market in stocks runs into its ninth year, will want to lock in their gains in super-safe long-term Treasurys, Mr. High said.
Demand for long-term debt is expected to be so persistent and strong that BNP Paribas is forecasting the yield on 30-year Treasurys will fall as much as 0.2 percentage point below their 10-year counterpart by year-end. (At a yield of 3.08%, 30-year bonds currently yield about 0.15 percentage point more.).
Stuart Sparks, a bond analyst at Deutsche Bank, agrees with the strong demand premise, but questions the shelf-life of pension funds’ appetite. Mr. Sparks argues that a temporary tax benefit that was included in December’s tax cuts—which expires on Sept. 15—is a key to explaining why demand for the debt has been so strong.
That benefit is an opportunity for companies with underfunded pension plans to catch up on their obligations, analysts say. Firms that contribute through mid-September of this year can receive deductions based on the old 35% corporate tax rate, rather than the new 21% rate. A company that contributes $1 million to an underfunded pension plan could have $350,000 in tax savings before the deadline, but would have savings of just $210,000 after September.
Some companies, such as Verizon Communications Inc., have been increasing the pace of their bond buying, moving forward purchases now that would ordinarily have taken place later in the year, after the tax deadline, Mr. Sparks said. While demographics play an important role in shaping the absolute amount of demand, the Sept. 15 deadline has accelerated purchases rather than adding to them, and demand should decline noticeably later in the year.
Are you buying long-term bonds? Tell the author your thoughts at daniel.kruger@wsj.com.
 
 

Market Facts

  • The Nasdaq Composite opened 0.9% higher on Tuesday but reversed throughout the day to close lower. Such reversals typically augur short-term underperformance but medium-term outperformance, according to Bespoke Investment Group.
  • The price of bitcoin traded above $8,000 for the first time in two months on Tuesday as the crypto-currency rebounded after a dismal start to the year.
  • On this day, the Panic of 1893 reached its low point. With nearly one-quarter of the nation’s railroads heading into bankruptcy, the directors of the NYSE nearly closed down the exchange.