Treasurys Pull Back Ahead of Fed Statement
July 25 2017 - 4:08PM
Dow Jones News
By Sam Goldfarb
A bout of selling hit the U.S. government bond market Tuesday as
investors hedged their bets ahead of the conclusion of the Federal
Reserve's two-day policy meeting.
Bond prices dropped at the start of trading in Europe and
continued falling for most of the U.S. trading session without much
of a catalyst to spark the move.
The selling sent the yield on the benchmark 10-year Treasury
note to 2.328% from 2.253% Monday, marking its largest one-day
increase since March 1. Yields rise when bond prices fall.
After two weeks of gains, investors and analysts said the time
was probably right for a pullback in the market, especially as the
Fed prepares to make its latest policy statement on Wednesday.
Small to moderate selloffs heading into Fed decisions have
happened often recently, as the central bank has begun to slowly
raise interest rates.
In this case, investors don't expect the central bank to lift
rates. But the central bank could set a date for when it will start
unwinding its balance sheet -- a move that, while not a big
surprise, would signal a level of confidence in the economy and a
willingness to pursue tighter monetary policies.
"If they go ahead and announce the actual date, even if it's
October, that would indicate that they must have learned
something," said Jim Vogel, interest-rates strategist at FTN
Financial.
Other factors also weighed on Treasurys. Strong corporate
earnings and a move higher in oil prices helped push up U.S. stocks
and sap demand for haven bonds. There was also a $26 billion sale
of two-year notes, the first of three auctions this week.
The combination of a Fed meeting and new debt supply "tends to
push customers to the sideline and maybe get people a little
nervous," said Ray Remy, head of fixed-income trading in New York
at Daiwa Capital Markets America Inc.
This week's turn toward higher yields is the latest twist for
the Treasury market, which has endured big swings over the past
month.
Toward the end of June, bonds sold off sharply amid signs that
major central banks outside of the U.S., such as the European
Central Bank and the Bank of England, were poised to start scaling
back stimulus programs.
After spending two weeks climbing higher, yields proceeded to
fall almost as hard as central bank officials on both sides of the
Atlantic suggested they would be cautious about tightening monetary
policy in the face of soft inflation data.
Though occasionally influenced by political developments,
investors say that the fate of the Treasurys market largely comes
down to economic data. If inflation picks up, it would present a
clear path for the Fed to keep raising interest rates, likely
pushing the 10-year yield back toward its 2017 high of around
2.6%.
If inflation remains stuck below the Fed's 2% annual target,
many investors expect yields to either fall or stay around current
levels.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
July 25, 2017 15:53 ET (19:53 GMT)
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