BOND REPORT: Treasury Yields Slip Ahead Of Fed Minutes

By 0 and Sunny Oh Features Dow Jones Newswires

Treasury yields fell Wednesday ahead of the release of the minutes from the Federal Reserve policy-making panel's meeting earlier this month as investors gauge the chance of a June rate hike.

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The yield on the policy-sensitive 2-year note lost 2 basis points to 1.313%. Bond prices move in the opposite direction of yields; one basis point is equal to one hundredth of a percentage point. The 10-year note yield declined 0.8 basis point to 2.273%, while the 30-year bond yield fell 1.6 basis point to 2.928%.

Yields fell as traders wait for the Federal Open Market Committee's minutes from the May meeting at 2 p.m. Eastern. Investors will hope for further clarification on the central bank's timetable for its tightening cycle. Since the FOMC policy statement was issued, Fed speakers including St. Louis Fed President James Bullard (http://www.marketwatch.com/story/feds-bullard-questions-need-for-june-rate-hike-2017-05-19) and Fed. Gov. Lael Brainard cast doubt on the likelihood of two further rate rises this year, showing there was more disagreement on the central bank's direction than the statement had suggested.

See: Fed minutes may quell doubt about a June interest-rate hike (http://www.marketwatch.com/story/fed-minutes-may-quell-fresh-doubts-about-a-june-rate-hike-2017-05-19)

But traders for the most part expect the Fed to hike its benchmark short-term interest rate by a quarter of a percentage point in June. The Chicago Mercantile Exchange's FedWatch tool (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html)showed traders expected a 83% chance of a June rate increase.

Yields also slipped during overnight sessions as Moody's downgraded the credit rating (http://www.marketwatch.com/story/moodys-downgrades-china-rating-for-the-first-time-in-nearly-30-years-2017-05-24) for China's government debt over concerns of an excessive buildup in its economy, attracting flows from Chinese money managers, said traders. The ratings agency had lowered China to Aa3 from A1, at the same, raising its outlook to stable from negative. The credit outlook is more of a reflection of whether or not the rating is likely to change rather than an overall judgment on the creditworthiness of the issuer.

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"While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economywide debt, and the consequent increase in contingent liabilities for the government," said the statement from Moody's.

The rating change didn't have a lasting effect on China's equity, bonds and currency market .

See: Here's how China's credit crackdown could derail the U.S. stock market (http://www.marketwatch.com/story/heres-how-chinas-credit-crackdown-could-derail-the-us-stock-market-2017-05-09)

On the docket for Wednesday, Dallas Fed President Robert Kaplan will appear at a moderated discussion in Toronto at 6 p.m. Eastern. Shortly after, Minneapolis Fed President Neel Kashkari will join in a town hall discussion in Ashland, Wis., at 6:30 p.m. Eastern.

Looking ahead, traders will eye a $34 billion auction of 5-year Treasury notes after seeing keen demand for the sale of 2-year notes on Tuesday. Auctions can affect yields and prices for U.S. government paper for the outstanding market.

(END) Dow Jones Newswires

May 24, 2017 09:28 ET (13:28 GMT)