Treasurys Strengthen Amid Month-End Demand

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds strengthened again Wednesday as the market benefited from month-end demand.

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In recent trading, the yield on the benchmark 10-year Treasury note was 2.206%, according to Tradeweb, compared with 2.217% Tuesday. Yields fall when bond prices rise.

Traders say month-end buying is likely to provide some support for the bond market Wednesday.

During the last trading session of a month, newly minted bonds replace maturing debt in some bond indexes. Fund and portfolio managers who track bond indexes need to replicate the move by buying Treasurys. Some investors adjust their portfolios before the last trading session of a month.

In recent weeks, bond investors have grown increasingly confident that there won't be a big increase in inflation in the coming months. That has made bonds more attractive because inflation chips away their fixed returns over time and can spur the Fed to raise interest rates, which also diminishes the value of outstanding government debt.

A report Tuesday showed the Fed's preferred gauge of inflation ticked up in April from the previous month, but on an annual basis, remained stuck below the central bank's 2% target. The personal-consumption expenditures price index was 1.7% on an annualized base in April, down from 1.9% in March. Excluding food and energy, the reading was 1.5%, down from 1.6% in March.

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Events in Washington have also helped to lower inflation expectations. Investors began the year expecting Congress to pass fiscal stimulus that could boost economic growth and inflation, but they have grown more skeptical as Congress has struggled to pass major legislation and President Donald Trump has been hit by a series of negative reports related to his firing of former FBI Director James Comey and possible Russian interference in the 2016 election.

The 10-year yield's lowest close this year was 2.177% on April 18. The yield climbed back to 2.4% in early May, but then quickly declined again.

One factor preventing yields from declining further is the strong consensus among investors that the Fed will raise rates in June and start unwinding its balance sheet later this year in an effort to return monetary policy to a more normal footing.

Analysts say that investors should get a better sense for the Fed's plans after its next policy meeting concludes on June 14, the same day as investors will get new data on the consumer-price index and retail sales.

"We should have a much better picture for rates going forward after the 14th because you're going to see if CPI rebounds, you're going to see some consumer spending in the form of retail sales, and you're going to hear from the Fed," said Timothy High, senior U.S. interest-rate strategist at BNP Paribas.

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

U.S. government bonds strengthened again Wednesday as month-end buying added to demand that has been building along with declining inflation expectations.

The yield on the benchmark 10-year Treasury note settled at 2.198%, compared with 2.217% Tuesday. Yields fall when bond prices rise.

In recent weeks, bond investors have grown increasingly confident that there won't be a big increase in inflation in the coming months. That has made bonds more attractive because inflation chips away their fixed returns over time and can spur the Fed to raise interest rates, which also diminishes the value of outstanding government debt.

A report Tuesday showed the Fed's preferred gauge of inflation ticked up in April from the previous month, but on an annual basis, remained stuck below the central bank's 2% target.

Events in Washington have also helped to lower inflation expectations. Investors began the year expecting Congress to pass fiscal stimulus that could boost economic growth and inflation. But they have grown more skeptical as Congress has struggled to pass major legislation and President Donald Trump has been hit by a series of negative reports related to his firing of former FBI Director James Comey and investigations into Russian interference in the 2016 election.

Bonds got an extra boost Wednesday from month-end buying. During the last trading session of a month, newly minted bonds replace maturing debt in some bond indexes, and fund and portfolio managers who track the indexes need to replicate the move by buying Treasurys.

The 10-year yield's lowest close this year was 2.177% on April 18. The yield climbed back to 2.4% in early May but quickly declined again.

One factor preventing yields from falling further is the strong consensus among investors that the Fed will raise rates in June and start unwinding its balance sheet later this year in an effort to return monetary policy to a more normal footing.

Analysts say that investors should get a better sense for the Fed's plans after its next policy meeting concludes on June 14, the same day as new data is released on the consumer-price index and retail sales.

"We should have a much better picture for rates going forward after the 14th because you're going to see if CPI rebounds, you're going to see some consumer spending in the form of retail sales, and you're going to hear from the Fed," said Timothy High, senior U.S. interest-rate strategist at BNP Paribas.

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

(END) Dow Jones Newswires

May 31, 2017 15:43 ET (19:43 GMT)