U.S. Government Bond Prices Rebound from Earlier Declines

Prices of U.S. government bonds fell Monday as investors prepared for hectic new debt supply and the likelihood of the Federal Reserve raising short-term interest rates later this week.

The selling was contained as technology shares extended Friday's selloff, driving some money into the haven bond market. The tech-heavy Nasdaq stock index has outperformed the Dow and S&P 500 index this year, fueling some concerns whether valuation is getting stretched.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.218%, according to Tradeweb, compared with 2.201% Friday. Yields rise as bond prices fall.

A $24 billion sale of three-year notes is due at 11:30 a.m. Monday, followed by a $20 billion sale of 10-year notes at 1 p.m. Monday. The Treasury will also sell three-month and six-month T-bills Monday. On Tuesday, a $12 billion sale of 30-year bonds is scheduled along with a sale of four-week bills.

The jammed supply schedule weighed down Treasury bond prices Friday despite the selloff in Nasdaq. Traders say higher yields are needed to attract buyers, because investors may be hesitant to buy ahead of the Fed's interest rate decision due Wednesday afternoon.

"There is a lot of supply to digest in a short period particularly given it is coming right in front of [the Fed] where it is expected to raise rates," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.

The Fed is widely expected to raise rates again after doing it in last December and March. Analysts say the stock weakness is unlikely to stop the Fed from tightening policy, unless the stock market suffers a big slide from here and tightens financial conditions sharply.

For bond investors, the key question is what would the Fed do beyond June along with any update on its plan to start unwinding a balance sheet that includes more than $2 trillion worth of Treasury bonds.

The 10-year Treasury yield has fallen from this year's peak -- slightly above 2.6% in March -- as many investors expect the Fed to be cautious and slow in tightening monetary policy. Signs of slowing inflation in recent months have bolstered some investors' expectations that the June hike may be the last one this year. The yield settled at 2.147% on June 6, the lowest level since November.

Some analysts say bond yields could fall if the Fed highlights concerns about decelerating inflation, which would raise market speculation that the central bank could stand pat during the second half of this year.

Matt Freund, co-chief investment officer and head of fixed-income strategies at asset manager Calamos Investments, said a slowly-moving Fed reduces the risk of a big rise in Treasury bond yields.

Central bank officials are mindful of the "taper tantrum" in the Treasury bond market during the summer of 2013. The 10-year Treasury rose sharply as comments from then Fed Chairman Ben Bernanke about a possible cut in bond buying caught investors off guard. Higher Treasury yields rippled into many other fixed-income markets, caused a record pace of outflows from bond funds and tightened financial conditions for the U.S. economy.

Mr. Freund bought Treasurys earlier this year. If the 10-year yield approaches this year's peak again, it would be a buying opportunity, he said.

The risk for bond investors is that the Fed largely maintains its status quo and signals it will continue to monitor upcoming data before making further decisions on their rate increase plan.

John Canavan, market analyst at Stone and McCarthy Research Associates, warns that the bond market may underestimate the Fed's tightening pace. He still expects the Fed to raise rates one more time this year after a June hike, as the slowdown in inflation could be transitory.

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

U.S. government bonds rebounded from earlier price declines after a three-year note auction drew the strongest demand since December 2015.

Solid demand came even as bond investors face a jammed auction schedule this week. A $20 billion sale of 10-year notes is due at 1 p.m. Monday followed by a $12 billion sale of 30-year bonds Tuesday.

Traders say it is a sign investors are looking beyond the likelihood of the Federal Reserve raising short-term interest rates Wednesday. Buyers expect the Fed to continue to go slowly in tightening monetary policy especially as inflation pressure has been slowing down, which makes government debt appealing to bond buyers at a time when U.S. bonds continue to offer more attractive yields than their peers in Germany, the U.K. and Japan.

"The market continues to price in a lower trajectory of rate hikes than the path predicted by the Fed in prior meetings," said Michael Lorizio senior trader at Manulife Asset Management.

Robust demand for haven bonds also reflects some concerns about the U.S. stock market. Technology shares suffered a selloff Friday and softened Monday. The tech-heavy Nasdaq stock index has outperformed the Dow and S&P 500 index this year, fueling some concerns whether valuation is getting stretched. For some investors, buying Treasurys offers some protection if stocks suffer a larger downturn.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.194%, according to Tradeweb, compared with 2.201% Friday. Yields fall as bond prices rise.

Some traders caution that the price rebound could dilute buying interest for the 10-year auction, and a weaker than expected auction outcome could put selling pressure on the bond market again.

The 10-year yield had risen to 2.223% earlier in the session as investors and bond dealers prepared for new debt sales. The jammed supply schedule weighed down Treasury bond prices Friday despite the selloff in Nasdaq.

The Fed is widely expected to raise rates again after doing it last December and March. Analysts say the stock weakness is unlikely to stop the Fed from tightening policy, unless the stock market suffers a big slide from here and tightens financial conditions sharply.

For bond investors, the key question is what the Fed would do beyond June along with any update on its plan to start unwinding a balance sheet that includes more than $2 trillion worth of Treasury bonds.

Matt Freund, co-chief investment officer and head of fixed-income strategies at asset manager Calamos Investments, said a slowly-moving Fed reduces the risk of a big rise in Treasury bond yields.

Mr. Freund bought Treasurys earlier this year. If the 10-year yield approaches this year's peak again, it would be a buying opportunity, he said.

The risk for bond investors is that the Fed largely maintains its status quo and signals it will continue to monitor upcoming data before making further decisions on their rate increase plan.

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

(END) Dow Jones Newswires

June 12, 2017 12:50 ET (16:50 GMT)