U.S. Government Bonds Pull Back

By Min Zeng Features Dow Jones Newswires

U.S. government bonds pulled back on the first day of May after logging the biggest monthly price rally since last June.

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In recent trading, the yield on the benchmark 10-year Treasury note was 2.302%, according to Tradeweb, compared with 2.282% Friday. Yields rise as bond prices fall.

Demand for haven bonds retreated after congressional leaders reached an agreement to fund the government through Sept. 30. The deal avoided a potential federal government shutdown.

Another factor is sending yields higher: Both President Donald Trump and Vice President Mike Pence in television interviews Sunday suggested confidence that they could win enough votes to pass a bill to undo the Affordable Care Act.

The bond market pared price declines after a disappointing manufacturing release raised some questions toward the U.S. economic growth momentum.

The monthly manufacturing index from the Institute for Supply Management fell to 54.8 last month from 57.2 in March. Economists had expected a 56.5 reading. A reading above 50 signals expansion, while a reading below 50 suggests contraction.

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"The headline reading unwound the year's gains and returns us to about where it stood in December," said Derek Holt, head of capital markets economics at Scotiabank. "Decent growth is still being signaled, but so is a potential plateau."

The 10-year Treasury yield has fallen after a big rise since the U.S. Election in November. The yield traded above 2.6% in mid-March. In April, the yield declined by 0.114 percentage points, the largest one-month decline since June 2016.

A confluence of factors has boosted demand for bonds again. Investors are skeptical over Mr. Trump's capability to push through his fiscal agenda soon. A number of economic releases over the past month have been disappointing. Friday's data showed the U.S. economy grew at the slowest pace in three years during the first quarter of 2017.

Many commodities prices, including crude oil, have softened, deflating worries over higher inflation which erodes the value of Treasury bonds over time. Monday's report showed the price index for personal-consumption expenditures, the Federal Reserve's preferred inflation gauge, declined 0.2% from a month earlier. Core prices, which exclude food and energy, fell 0.1%--the first drop in core prices since September 2001.

This week is packed with some key economic releases. Wednesday, a private-sector jobs report and the ISM's service index are due, followed by Friday's nonfarm employment report.

The Fed is scheduled to start its two-day policy meeting Tuesday, and is widely expected to hold short-term interest rates steady after a rate increase in March.

Some Fed officials have signaled in recent weeks that the door remains open for the Fed to raise rates again in June.

The odds for the Fed to tighten policy by its June 13-14 meeting were 66% Monday, according to CME Group. The odds were 70% Friday.

The second round of France's presidential race is May 7. Emmanuel Macron, the pro-European independent candidate, is expected to beat right-wing candidate Marine Le Pen. Ms. Le Pen has called for France's exit out of the eurozone. Should she pull off an upset, investors may flock to Treasury bonds and dial back risks, say analysts.

The Treasury is also scheduled to release its quarterly refunding announcement Wednesday, a major platform for officials to make big changes regarding Treasury auctions. Debate has been growing lately on whether the Treasury may consider selling Treasury bonds maturing in more than 30 years to fund its large fiscal stimulus down the road.

The longest maturity the Treasury sells to investors now is 30 years.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

May 01, 2017 11:43 ET (15:43 GMT)