U.S. Government Bonds Little Changed
May 25 2017 - 12:10PM
Dow Jones News
By Min Zeng
The U.S. government bond market was little changed after earlier
price gains Thursday, hurt by stocks and a looming new debt
auction.
In recent trading, the yield on the benchmark 10-year Treasury
note was 2.268%, according to Tradeweb, compared with 2.266%
Wednesday. Yields rise as bond prices fall.
The yield had fallen to 2.243% earlier in the session. The
Federal Reserve's release Wednesday afternoon of policy-meeting
minutes signaled a slow pace in tightening monetary policy,
soothing concerns over a big rise in yields that would send the
value of outstanding bonds plunging.
Higher stocks reflect improving risk appetites, diluting demand
into the haven bond market. The S&P 500 index reached a fresh
record high Thursday. The bond market also faces $28 billion sale
of seven-year notes at 1 p.m. Thursday, the last leg of this week's
new Treasury debt offerings.
The Bank of America Merrill Lynch MOVE index, which measures
implied Treasury bond price swings based on options, pointed to
subdued expectation over price swings. The index settled at 54.4058
Wednesday, the lowest level since Aug 2014.
A lower reading suggests investors expect smaller price swings
or a relatively tight trading band for yields. Traders expect the
10-year Treasury yield to continue to trade between 2.2% and 2.5%
in the near term.
The Fed's minutes for its policy meeting earlier this month
suggests the central bank is on track to raise short-term interest
rates next month. But officials signaled they may hold steady if
economic conditions don't warrant a move so soon.
In addition, Fed officials suggested a slow and predictable
manner when they start the process of winding down its large
balance sheet which includes more than $2 trillion worth of
Treasury bond holdings.
Traders say the release reassure investors that the central bank
would try to avoid a repeat of the taper tantrum. U.S. Treasury
bond yields soared in 2013 as fears that the Fed would soon dial
back bond buying spook sentiment. Higher yields rippled broadly
into corporate debt and emerging markets, causing a record pace of
outflows from bond funds, tightening financial conditions and
undercutting the U.S. growth momentum.
"The Fed will do everything they can to make sure that doesn't
happen again," said Thomas Roth, executive director in the rates
trading group at MUFG Securities Americas Inc. "You can bank on
that."
The 10-year Treasury yield has fallen this year after a big rise
in late 2016. The yield traded at 2.446% at the end of 2016. In mid
March, it had traded above 2.6%.
Lower bond yields also reflect a camp of thoughts in the bond
market that after a possible hike in June, the Fed may stand pat
for the rest of the year, say some analysts.
This explained why the bond market didn't sell off even as
financial derivatives linked to bets on the Fed's policy outlook
priced in a large probability that the Fed would pull the trigger
at its June 13-14 meeting.
The idea runs against the Fed's projections in March about two
additional hikes following the March move. Yet some investors say
the Fed may be forced to pause given the uncertainty surrounding
the outlook for the U.S. growth momentum, inflation and fiscal
stimulus.
"Although the committee may want to raise rates again, we feel
the Fed will tighten in June and then shift its focus to the
reduction of its balance sheet," said Sean Simko, head of
fixed-income portfolio management at SEI Investments.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
May 25, 2017 11:55 ET (15:55 GMT)
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