Treasurys Steady Ahead of Fed Minutes

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds held to a tight range Wednesday as traders awaited minutes from the Federal Reserve's May meeting.

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In recent trading, the yield on the benchmark 10-year Treasury note was 2.283%, according to Tradeweb, compared with 2.285% Tuesday.

Yields, which rise when bond prices fall, have climbed this week in part because of a large volume of new debt sales from both the Treasury and the private sector.

The Treasury on Tuesday auctioned off $26 billion of two-year Treasury notes. It will sell $34 billion of five-year notes Wednesday and $28 billion sale of seven-year notes Thursday.

Meanwhile, corporate bond supply has also been robust as companies take advantage of relatively calm markets ahead of the Memorial Day holiday. Firms and banks that underwrite new corporate debt typically sell Treasurys to hedge against unwanted interest-rate swings.

The minutes of the Fed's May 2-3 meeting, due Wednesday afternoon, could provide insight into whether the central bank will raise interest rates next month for the second time this year and third time since last December.

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For the most part, Fed officials have expressed satisfaction with the state of the economy, giving investors the sense that they will raise rates at their June 13-14 policy meeting. That could allow the Fed to raise rates once more in the fall and possibly start winding down the Fed's large balance sheet by the end of the year.

Fed-funds futures, used by investors to bet on the Fed's policy outlook, recently showed 83% odds that the Fed would raise short-term interest rates at its June meeting, according to CME Group, up from 63% a month ago.

Higher interest rates from the central bank reduce money supply in the broader economy and shrink the value of outstanding bonds.

On Tuesday, Federal Reserve Bank of Philadelphia President Patrick Harker, currently a voting member of the Fed's interest-rate setting committee, said a rate increase in June "is a distinct possibility," explaining that he didn't put much stock in recent soft economic data and political turmoil.

Still, a couple of officials this week have expressed uncertainty about the health of the labor market and concern about recent inflation data that showed a softening of prices outside of food and energy categories.

Despite investors' expectations of a June rate increase, Treasury yields remain well off their peak from earlier this year, when there was more speculation about four rate increases this year and an inflation-boosting fiscal-stimulus package from Congress.

At this point, "nobody's expecting the Fed to hike too fast and too much, " said Stanley Sun, interest-rates strategist at Nomura Securities International in New York. Until investors get more clarity into the Fed's plans for its balance sheet, it is "probably going to be hard for yield to move too much," he said.

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

(END) Dow Jones Newswires

May 24, 2017 10:51 ET (14:51 GMT)