BOND REPORT: 2-year Treasury Yields Set For Weekly Rise

By Mark DeCambre, MarketWatch Features Dow Jones Newswires

Longer-dated yields down as yield curve flattens

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U.S. Treasury yields declined on Friday, but the yield on short-dated notes remained on track to post a weekly gain.

Longer dated yields declined, however, as the yield curve continued to flatten in the wake of the Federal Reserve's decision Wednesday to raise interest rates and outlined a plan to begin shrinking its balance sheet.

The two-year Treasury note declined 2.8 basis points to 1.327%. For the week, however, the yield is up from 1.338% last Friday. Bond prices and yields move in opposite directions.

Meanwhile, the yield on the 10-year note , was at 2.16%, down marginally from the prior session. Although the benchmark bond is off its intraday low 2.096% set on Wednesday, for the week, the benchmark security is down more than 4 basis points. The 30-year bond yield , was little changed at 2.788%.

Bond yields edged lower after new housing showed that construction fell in May for the third month in a row (http://www.marketwatch.com/story/home-builders-cut-back-for-third-straight-month-2017-06-16), even though builders are optimistic about the economy. The pace of so-called housing starts declined by 5.5% to an annual rate of 1.09 million, marking the lowest level in eight months.

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Treasury yield moves this week come as the Fed elaborated on its plan to normalize monetary policy and shrink its $4.5 trillion balance sheet. Chairwoman Janet Yellen said. on Wednesday during an afternoon news conference, after the Fed raised rates for the fourth time since the end of 2015, that the Fed is "monitoring" stubbornly low inflation but isn't ready to veer from its tightening schedule, deeming recent week data as "one-off."

However, the slippage in longer-dated yields may imply that investors aren't as unfazed by a batch of data, including a recent tepid reading of consumer prices, (http://www.marketwatch.com/story/inflation-falls-again-in-may-as-cpi-recedes-from-recent-high-water-mark-2017-06-14) that has signaled that inflation and perhaps the economy, may not perform as optimally as the central bank hopes. Weaker inflation can encourage buying in bonds because higher inflation erodes the fixed payments of the securities.

Also, the relative attractiveness of U.S. government paper compared with European and Asian sovereign bonds also may factor into yields hanging at persistently lower levels, even as the Fed takes steps that should otherwise deliver boost to yields, which move inversely to bond prices.

Bond investors tend to sell existing government paper in a rate-hike cycle in anticipation of richer -yielding new issuance.

A midyear report on the outlook of assets by LPL Research published Friday indicates an expectation that 10-year yields could stay lower into the end of the year:

"'We expect the 10-year Treasury yield to end 2017 in the 2.25%--2.75% range, with the potential for moves toward 3.0% should anticipated policy support lead to a meaningful rise in economic activity. Divergent global central bank activities, moderate inflation pressures, and attractive valuations for U.S. Treasurys relative to global alternatives may support bonds at higher yields," the report read.

Looking ahead, The U.S. Treasury Department will auction $97 billion in securities next week, comprising $53 billion in new debt and $44 billion in previously sold debt

(END) Dow Jones Newswires

June 16, 2017 09:21 ET (13:21 GMT)