U.S. Government Bonds Settle Into Tight Range

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bond prices edged higher Friday, sustaining a modest rally that began Wednesday in response to signals that the Federal Reserve would maintain its cautious approach to tightening monetary policy.

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In recent trading, the yield on the 10-year Treasury note was 2.238%, according to Tradeweb, compared with 2.254% Thursday. Yields fall as bond prices rise.

Minutes for the Fed's May 2-3 policy meeting released Wednesday suggested the central bank is on track to raise short-term interest rates next month. But officials indicated they may hold steady if upcoming economic data doesn't match their expectations.

In addition, Fed officials signaled they were coalescing around a plan to slowly unwind the central bank's balance sheet, reassuring investors who have feared a faster termination of the Fed's policy of reinvesting proceeds from maturing bonds into new securities.

The yield on the 10-year note had climbed at the start of the week but has declined since closing at 2.285% on Tuesday.

Treasurys got a boost overnight as investors in Europe pared bets on riskier assets. Yields ticked higher at the start of U.S. trading, but some analysts were expecting a fairly quiet session ahead of the Memorial Day holiday.

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"We remain in this very tight range," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. "I think we've got priced in a Fed hike on June 14 and then it becomes a question mark."

A round of economic data Friday had little impact on the market. Economic growth in the first quarter was revised up to 1.2% from 0.7%. But a closely watched proxy for business spending on new equipment was flat in April, disappointing investors who had expected a small increase in orders.

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

U.S. government bonds retraced early gains Friday, ending the day little changed amid signs that investors have grown comfortable with current prices.

The yield on the 10-year Treasury note settled at 2.248%, compared with 2.254% Thursday. The bond market closed at 2 p.m. and will remain shut Monday in observance of Memorial Day.

Yields, which rise when bond prices fall, had climbed early in the week as the market was flooded with new debt supply from both the Treasury and the private sector. Momentum shifted Wednesday with the release of minutes from the Federal Reserve's May 2-3 meeting, which suggested the Fed would continue to take a cautious approach to tightening monetary policy.

Ultimately, though, the 10-year yield was roughly unchanged on the week, ticking up from 2.243% the previous Friday.

The Bank of America Merrill Lynch MOVE index, which measures expected Treasury bond price swings based on options, settled at 54.3201 Thursday, its lowest level since August 2014.

"We remain in this very tight range," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. "I think we've got priced in a Fed hike on June 14 and then it becomes a question mark."

A round of economic data on Friday had little impact on the market. Economic growth in the first quarter was revised up to 1.2% from 0.7%. But a closely watched proxy for business spending on new equipment was flat in April, disappointing investors who had expected a small increase in orders.

Next week could bring more significant data for bond investors. The Fed has strongly signaled that it will raise interest rates at its June 13-14 meeting. But officials have promised to keep a close watch on inflation, and their preferred gauge of consumer prices will be in the spotlight Tuesday.

The Commerce Department's personal-consumption expenditures price index surpassed the Fed's 2% annual target for the first time in nearly five years in February. But it fell back to 1.8% in March, concerning some Fed officials who say the central bank should be careful about tightening monetary policy as long as inflation pressures remain muted.

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

(END) Dow Jones Newswires

May 26, 2017 15:03 ET (19:03 GMT)