U.S. Government Bonds Little Changed

By Min Zeng Features Dow Jones Newswires

The U.S. government bond market was little changed after earlier price gains Thursday, hurt by stocks and a looming new debt auction.

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In recent trading, the yield on the benchmark 10-year Treasury note was 2.268%, according to Tradeweb, compared with 2.266% Wednesday. Yields rise as bond prices fall.

The yield had fallen to 2.243% earlier in the session. The Federal Reserve's release Wednesday afternoon of policy-meeting minutes signaled a slow pace in tightening monetary policy, soothing concerns over a big rise in yields that would send the value of outstanding bonds plunging.

Higher stocks reflect improving risk appetites, diluting demand into the haven bond market. The S&P 500 index reached a fresh record high Thursday. The bond market also faces $28 billion sale of seven-year notes at 1 p.m. Thursday, the last leg of this week's new Treasury debt offerings.

The Bank of America Merrill Lynch MOVE index, which measures implied Treasury bond price swings based on options, pointed to subdued expectation over price swings. The index settled at 54.4058 Wednesday, the lowest level since Aug 2014.

A lower reading suggests investors expect smaller price swings or a relatively tight trading band for yields. Traders expect the 10-year Treasury yield to continue to trade between 2.2% and 2.5% in the near term.

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The Fed's minutes for its policy meeting earlier this month suggests the central bank is on track to raise short-term interest rates next month. But officials signaled they may hold steady if economic conditions don't warrant a move so soon.

In addition, Fed officials suggested a slow and predictable manner when they start the process of winding down its large balance sheet which includes more than $2 trillion worth of Treasury bond holdings.

Traders say the release reassure investors that the central bank would try to avoid a repeat of the taper tantrum. U.S. Treasury bond yields soared in 2013 as fears that the Fed would soon dial back bond buying spook sentiment. Higher yields rippled broadly into corporate debt and emerging markets, causing a record pace of outflows from bond funds, tightening financial conditions and undercutting the U.S. growth momentum.

"The Fed will do everything they can to make sure that doesn't happen again," said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc. "You can bank on that."

The 10-year Treasury yield has fallen this year after a big rise in late 2016. The yield traded at 2.446% at the end of 2016. In mid March, it had traded above 2.6%.

Lower bond yields also reflect a camp of thoughts in the bond market that after a possible hike in June, the Fed may stand pat for the rest of the year, say some analysts.

This explained why the bond market didn't sell off even as financial derivatives linked to bets on the Fed's policy outlook priced in a large probability that the Fed would pull the trigger at its June 13-14 meeting.

The idea runs against the Fed's projections in March about two additional hikes following the March move. Yet some investors say the Fed may be forced to pause given the uncertainty surrounding the outlook for the U.S. growth momentum, inflation and fiscal stimulus.

"Although the committee may want to raise rates again, we feel the Fed will tighten in June and then shift its focus to the reduction of its balance sheet," said Sean Simko, head of fixed-income portfolio management at SEI Investments.

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

(END) Dow Jones Newswires

May 25, 2017 11:55 ET (15:55 GMT)