Treasurys Eke Out Small Price Gains as Investors Monitor Oil Prices

By Min Zeng Features Dow Jones Newswires

U.S. government bonds eked out some price gains Thursday with the yield on the benchmark 10-year Treasury note falling to near its 2017 low.

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Traders said lower government bond yields in Germany dragged down U.S. yields. Treasury debt continues to offer more attractive yields than government bonds in many developed countries, which has played a big role in holding U.S. long-term government bond yields at very low levels from a historical standpoint over the past few years.

The yield on the benchmark 10-year Treasury note settled at 2.153%, compared with 2.156% Wednesday. The yield's closing low in 2017 was 2.138% on June 14. Yields fall as bond prices rise.

Thursday's highlight was a $5 billion sale of 30-year Treasury inflation-protected security that drew the strongest demand since 2011.

The strong result surprised some traders and analysts because this asset class has been taking a beating lately due to softening consumer-price index reports in the U.S. and weaker energy prices.

The value of TIPS will be adjusted higher when inflation readings are on the rise, making them a popular vehicle for investors for inflation protection.

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Some analysts say buyers deem the recent selloff has turned TIPS into an attractive bargain.

Debate on inflation has been heating up lately, especially after Fed Chairwoman Janet Yellen last week said that slowing inflation data could be noisy and that a robust labor market may eventually push up inflation.

"There is still a lot of uncertainty regarding the inflation outlook and TIPS are a little bit more attractive here," said Dan Heckman, senior fixed-income strategist at U.S. Bancorp Wealth Management.

Mr. Heckman said the auction also appeals to investors looking for long-dated high quality assets to match their obligations such as pension funds.

Demand for long-dated bonds has been robust because large bond buying from the European Central Bank and the Bank of Japan continue to shrink the pool of assets available to private sector investors.

The indirect bidding, a proxy of foreign demand, was 76.1% for the 30-year TIPS sale. It was the highest level since June 2016, a sign of global investors' thirst for high-quality bonds in a low-yield world.

Another sign of investors' hunger for income: Argentina earlier this week sold $2.75 billion of 100-year bonds in U.S. dollars, which attracted nearly $10 billion in orders.

Investors are keeping an eye on crude oil futures, whose selloff this week has deflated inflation expectations and boosted the appeal of long-term government debt. Inflation chips away investors' purchasing power from their bond investments and is seen by investors as a big threat to the value of long-term Treasurys.

U.S. crude oil prices strengthened Thursday after settling Wednesday at the lowest level since August 2016., but still down about 12% this month.

Some analysts are concerned that the oil market may resume its slide again, a case that could drive long-term Treasury yields down further.

Treasury bond yields have fallen even as the Fed raised short-term interest rates last week for the second time this year and signaled another hike before the end of this year.

"The Fed keeps saying inflation is coming and the bond market continues to trade higher in price and lower in yield with almost the opposite viewpoint," said Kevin Giddis, head of fixed-income at Raymond James.

The yield on the 30-year Treasury bond settled at 2.724% Thursday, unchanged from Wednesday, which was the lowest close since Nov. 8, 2016. The 30-year bond has been the best performer lately, which is typically the case when inflation expectations diminish.

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

(END) Dow Jones Newswires

June 22, 2017 16:01 ET (20:01 GMT)