U.S. Government Bonds Strengthen on Drop in Durable Goods Orders

By Min Zeng Features Dow Jones Newswires

Long-term U.S. government bond yields closed at fresh 2017 lows on Monday as the latest sign of tepid U.S. business spending added to concerns over the economy's growth momentum and stoked demand for haven assets.

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The 1.1% decline in orders for durable goods -- products designed to last at least three years -- raised some investors' skepticism that the Federal Reserve could carry out another interest-rate increase during the second half of this year.

"The economic data continues to disappoint and is making the bond market very skeptical of any more rate hikes in the near future," said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc.

The yield on the benchmark 10-year Treasury note settled at 2.135%, compared with 2.146% Friday. It was the yield's lowest close since Nov 10, 2016.

The 30-year Treasury bond was the best performer, with its yield settling at 2.696%, compared with 2.715% Friday. It was the yield's lowest close since Nov 8, 2016.

Yields fall as bond prices rise.

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Higher interest rates from the Fed reduce money flowing into the broader economy and tend to shrink the value of outstanding U.S. government bonds.

Yet the 10-year Treasury yield has fallen this year even as the Fed has raised interest rates three times since December, pointing to the central bank's limits in influencing long-term bond yields. The 10-year yield traded at 2.446% at the end of last year.

A number of factors have sent the 10-year yield lower this year: skepticism over President Donald Trump's capability to push through his fiscal agenda; questions toward how robustly the U.S. economy has been expanding after a soft patch during the first three months of the year; and slowing inflation over the past few months despite signs of the labor market approaching full employment.

Reflecting investors' doubts over the Fed's rate-hike plan, a $26 billion sale of two-year Treasury notes Monday afternoon drew the strongest demand since Nov 2015.

A $34 billion sale of five-year notes is due Tuesday, followed by a $28 billion sale of seven-year notes Wednesday. Traders said the looming supply contained the bond market's price strength on Monday.

Fed Chairwoman Janet Yellen is scheduled to speak Tuesday in London. Investors will zero in on whether the Fed chief sticks to her expectations that slowing inflation would be temporary, which supports her case to continue raising short term rates in a gradual manner.

Lower bond yields suggest that some investors aren't buying the Fed's inflation outlook. Inflation is the big threat to long-term government debt as it chips away investors' purchasing power over time from their fixed income investments. Investors who buy long-term Treasurys expect slowing growth that will ease inflation pressure.

The Bank of America Merrill Lynch MOVE index, which measures investors' expectation of price swings in the Treasury bond market, settled at 51.1318 last Thursday, according to data from Bank of America Merrill Lynch. That marked the lowest reading since its record low of 48.8695 set on May 9, 2013.

"Bond investors don't anticipate that yields will move significantly higher or lower" due to moderate growth, contained inflation and a Fed that intends to remove monetary accommodation at a very gradual pace, said Donald Ellenberger, senior portfolio manager at Federated Investors.

Some analysts warn that the low volatility reading suggests investors are complacent.

"Bonds investors could be in for a rude awakening later this year if they engage in excessive risk taking at this time," said Andrew Pace, vice president at Performance Trust Capital Partners LLC.

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

(END) Dow Jones Newswires

June 26, 2017 16:28 ET (20:28 GMT)