U.S. Government Bonds Strengthen

By Min Zeng Features Dow Jones Newswires

U.S. government bonds gained ground Tuesday as uncertainty over U.S. fiscal policy outlook and disappointing housing data stoked demand for haven assets.

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The yield on the benchmark 10-year Treasury note settled at 2.329%, compared with 2.338% Monday. Yields fall as bond prices rise.

President Donald Trump shared sensitive intelligence obtained from a close U.S. ally with Russia's foreign minister and ambassador in a meeting last week, according to U.S. officials. The news followed Mr. Trump's decision earlier this month to fire FBI Director James Comey.

Investors are concerned that these developments inject a layer of uncertainty surrounding the timing and details of large fiscal stimulus.

Selling Treasury bonds has been a highlight for investors to bet that expansive fiscal policy including lower taxes and large infrastructure spending would lead to stronger economic growth and higher inflation, factors that reduce investors' appetite for haven bonds.

After a big rise late last year, the 10-year Treasury yield has fallen this year. The slide reflects skepticism toward Mr. Trump's capability to push through his fiscal agenda soon.

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"The noise created from such headlines is likely to keep congressional focus off the legislative agenda," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

Meanwhile, a report Tuesday showed U.S. home-building fell to the lowest level in five months, a sign of caution for the housing market. The release followed Friday's disappointing retail sales, adding to concerns over U.S. growth momentum.

Even as Treasury yields have pulled back from their 2017 high, U.S. stocks set fresh record highs this week. Analysts say one factor supporting investors' risk appetites is that some are still holding out hope that eventually fiscal stimulus would be rolled out despite the uncertainty surrounding the timing and the form.

The 10-year Treasury yield had risen to 2.359% earlier Tuesday, driven by new bond issuance.

New corporate debt supply this month has been robust as companies lock in still historically very low borrowing costs. Firms and banks underwriting the deals typically sell Treasury debt to hedge against unwanted interest-rate swings, reflecting the Treasury bond market's important role in global finance.

Some traders say the 10-year Treasury yield is likely to trade between 2.25% and 2.5% in the near term.

Krishna Memani, chief investment officer at OppenheimerFunds, said he doesn't expect the 10-year yield to rise to 3% this year, a level the yield last traded at in early 2014. If the yield moves above 2.5%, he said he would consider buying.

Fed-funds futures, used by investors to bet on the Federal Reserve's monetary-policy outlook, showed 74% odds that the central bank would raise short-term interest rates by its June 13-14 meeting, according to CME Group. The odds were 55% a month ago.

Analysts say with investors pricing in a high probability of a rate increase next month, it reduces the risk of a big selloff in the bond market. Some caution that the Fed could make a policy error given the uncertainty about the U.S. growth outlook and as inflation shows some signs of deceleration.

The share of investors expecting bond yields to fall was steady at 16% for the week that ended Monday, while the share of those betting on higher yields was unchanged at 27%, according to the weekly Treasury client survey from J.P. Morgan Chase & Co. released Tuesday. The share of fence-sitters still dominate, at 57% of the pool.

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

(END) Dow Jones Newswires

May 16, 2017 15:48 ET (19:48 GMT)