The bond market barely budged Wednesday afternoon following the latest signal that the Federal Reserve may start paring back its large bondholdings in the coming months.
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The yield on the benchmark 10-year Treasury note briefly ticked up to 2.35% after the release of the minutes for the Fed's June meeting. But it then slipped and settled at 2.334%, compared with Monday's 2.352%, its highest close since May 11.
Yields fall as bond prices rise. The U.S. bond market was shut Tuesday for the Independence Day holiday.
Traders said the muted reaction in the bond market suggested many investors don't expect a big rise in yields given the cautious approach taken by the Fed in normalizing its crisis-era monetary policy.
The minutes suggested the Fed was inching closer toward making the first step in cutting its large bondholdings. Yet it showed officials remained split on the timing to implement the exit strategy for its signature monetary stimulus following the 2008 financial crisis.
Policy makers are confronting the continued disconnect in the economy that is complicating the policy normalization process: a labor market that is approaching full employment versus signs of slowing inflation.
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"The Fed is divided over the timing of the balance sheet run-down and why inflation is where it is," said Luke Bartholomew, investment manager at Aberdeen Asset Management. "The market is going to struggle to read the tea leaves with this one."
The 10-year yield has jumped from this year's low of 2.135% set on June 26. Hawkish comments last week from top policy makers at central banks in the eurozone, Canada and the U.K. raised investors' concerns over a pivot toward tighter monetary policy, pushing up global government bond yields.
A closely watched survey showed Wednesday that sentiment was the most bearish on Treasury bond prices since last December.
The share of investors expecting higher bond yields rose to 32% for the week that ended Monday from 27% a week ago, according to the Treasury client survey from J.P. Morgan Chase & Co. The share of those expecting lower yields fell to 11% from 23%.
Analysts say a sustained rise in bond yields would need data showing stronger growth and higher inflation. The June nonfarm jobs report, due Friday, is this week's key data point.
The Fed in June raised its short-term interest rates for the third time since last December. Investors are debating whether the Fed may raise rates one more time before the end of this year or stand pat.
Some analysts said the Fed may slow down the pace of rate increases as it moves toward paring down its balance sheet, which may keep a lid on how high Treasury bond yields can go.
Short-term Treasury yields are highly sensitive to the Fed's rate increases. The yield on the two-year Treasury note was 1.414% Wednesday, unchanged from Monday and the highest close since Nov 2008.
But the 10-year Treasury yield remained below the 2.446% settled at the end of last year, underscoring the Fed's limits in influencing long-term bond yields.
Some investors expect the 10-year yield to rise to 2.6% or above by the end of this year. The yield last traded above 2.6% in mid-March. Others say the yield could be capped below 2.5% and that a rise toward 2.5% would be a buying opportunity.
The 10-year Treasury yield had fallen earlier as a disappointing factories report bolstered demand for haven assets. Orders for manufactured goods decreased 0.8% to a seasonally adjusted $464.86 billion in May, the Commerce Department said Wednesday. Economists surveyed by The Wall Street Journal expected orders to fall 0.6%.
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(END) Dow Jones Newswires
July 05, 2017 16:03 ET (20:03 GMT)