By Sam Goldfarb 

U.S. government bonds pulled back slightly Monday as investors took some chips off the table following a two-week rally.

The yield on the benchmark 10-year Treasury note settled at 2.253%, compared with 2.232% Friday. Yields rise when bond prices fall.

Analysts attributed the modest decline in bond prices mostly to profit-taking and caution ahead of Wednesday's Federal Reserve meeting and Friday's report on second-quarter U.S. economic growth.

"The market has rallied pretty significantly over the past couple of weeks," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. "We're not surprised to see a bit of consolidation here."

Before bond yields started to fall two weeks ago, they had been rising sharply, with the yield on the 10-year note nearly reaching 2.4% after falling below 2.2% in June.

Investors and analysts say the recent rally has been driven in part by a shift in tone from Fed officials, who have suggested that tepid inflation could cause the central bank to raise interest rates more slowly than previously anticipated. European Central Bank officials have also tamped down speculation about an imminent shift toward less monetary stimulus.

One factor that could depress bond prices this week is a trio of Treasury note auctions, starting with a $26 billion sale of two-year notes Tuesday, continuing with a $34 billion sale of five-year notes Wednesday, and ending with a $28 billion sale of seven-year notes Thursday. New debt sales sometimes weigh on the prices of outstanding bonds.

While the Fed isn't expected to raise interest rates Wednesday, it could still move the market through signals contained in its policy statement, analysts said. The central bank, for example, could provide more detail about when it will start reducing its balance sheet, which includes more than $2 trillion of Treasury debt.

Fed officials have said the process will begin this year, and many investors anticipate a start in the late summer or early fall, before the Fed raises rates again.

A reduction in the Fed's balance sheet could lead to lower prices on outstanding government debt, as the central bank allows some of its bondholdings to mature without replacing them with new bonds.

Fewer bond purchases by the Fed means more Treasury debt sold to the public. Still, many investors believe that the pullback by the Fed will take place slowly enough that it will have little effect on the market. Its impact on longer-term bond yields could also be mitigated if the Treasury Department responds mostly by selling more short-term debt, analysts say.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

July 24, 2017 15:48 ET (19:48 GMT)

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