BOND REPORT: Treasury Yields Inch Lower After Fed Minutes

By Sunny Oh Features Dow Jones Newswires

The yield for the 2-year note is the highest in nearly nine years

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Treasury yields ticked slightly lower after minutes from the Federal Reserve's June meeting reinforced the central bank's measured approach to lifting rates and shrinking its $4.5 trillion crisis-era balance sheet.

The yield for the 2-year note--the most sensitive to shifts in Fed policy-- ticked up 0.4 basis point to 1.414%.

However, yields for longer-dated Treasurys snapped a five-day climb, with the 10-year note yield falling 1.8 basis point to 2.334%, and the 30-year bond yield losing 1.2 basis point to 2.855%.

Bond prices rise as yields fall and one basis point is equal to one-hundredth of a percentage point.

Long-dated yields briefly slipped after the Fed minutes, released at 2 p.m. Eastern, suggested that divisions in the central bank's plans to raise benchmark rates may result in a more tempered rate-hike pace by the Federal Open Market Committee.

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"Headlines were broadly dovish, with the committee appearing divided and unsure of the timing of balance sheet hiking and tapering," wrote Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets. Minneapolis Fed President Neel Kashkari, a voting member, cast the sole vote against a June rate increase (http://www.marketwatch.com/story/fed-raises-rates-and-sets-plan-to-shrink-balance-sheet-this-year-2017-06-14) on concerns that slack lingered in the labor market.

Fed officials have justified its recent tightening stance on the so-called Phillips curve, an economic concept named for the late economist A.W. Phillips, which states that if unemployment falls inflation will ultimately rise as workers see wage increases.

However, an account of the central bank's June confab underscored growing doubts about the efficacy of the theory, with inflation falling below the Fed's 2% target range despite unemployment falling to 4.3%, its lowest since 2001 (http://www.marketwatch.com/story/us-adds-138000-jobs-in-may-unemployment-drops-to-16-year-low-of-43-2017-06-02).

A fresh round of labor-market numbers are due later in the week, with private-sector ADP Inc. data slated to come on Thursday and the more closely followed nonfarm-payroll report scheduled for Friday morning. Wall Street is eagerly looking for details on wage growth for clues about stubbornly low inflation.

See:Why hiring in the U.S. is slowing and will continue to slow. (http://www.marketwatch.com/story/why-hiring-in-the-us-is-slowing-and-will-continue-to-slow-2017-07-02).

Fed officials, including Chairwoman Janet Yellen, have suggested recent weakness in inflation data reflect one-time factors, justifying its continuing efforts to normalize monetary policy despite the signs of shakiness.

Bond investors also are paying attention to the timing of reductions to the Fed's bondholdings, as the prospect of a large buyer of Treasurys leaving the market could lift yields for U.S. government paper, further tightening policy.

Moves for bonds came against the backdrop of rising geopolitical tensions on the Korean Peninsula. North Korea tested an ICBM long-range missile (http://www.marketwatch.com/story/north-korea-claims-successful-test-firing-of-an-icbm-2017-07-04) on Tuesday that could potentially reach Hawaii or Alaska. In response, the U.S. and South Korea launched a joint military exercise.

See: Fed might start balance-sheet drawdown in September, FOMC minutes hint (http://www.marketwatch.com/story/fed-might-start-balance-sheet-drawdown-in-september-fomc-minutes-hint-2017-07-05)

Lyngen also cited a sharp fall in U.S. crude-oil futures , which settled more than 4% lower on Wednesday, and factory-orders data for the decline in Wednesday's yields, by lowering inflation and growth expectations. Rising inflation can erode a bond's fixed value.

Elsewhere, the IHS Markit purchasing manufacturer's index June reading for the eurozone edged off to 56.3 in June from 56.8 in May. A number above 50 indicates expansion. Despite the fall, PMI figures for the last three months grew at the fastest pace in six years on a quarterly basis.

Improving economic data in Europe could put the European Central Bank in a position to taper or end its bond-buying program soon, market participants said.

German 10-year government bondsand French 10-year government bondswere unchanged for the day.

See: 'Macron effect' helps lift eurozone PMI in June ()

(END) Dow Jones Newswires

July 05, 2017 17:55 ET (21:55 GMT)