Treasurys Strengthen as BOE Keeps Rates Steady

By Sam Goldfarb Features Dow Jones Newswires

Government bonds in the U.S. and Europe strengthened Thursday after the Bank of England held its benchmark interest rates steady and lowered its forecasts for economic growth.

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Minutes from the BOE's meeting showed that just two members of the central bank's rate-setting panel voted for a rate increase, down from three at its last meeting. The BOE also cuts its growth forecast for this year and next, further easing speculation that an improving global economy and tighter monetary policy from major central banks could weigh on government bonds in developed markets.

Reaction to the BOE's decision was strongest in the U.K., where the yield on the 10-year U.K. government was recently 1.171%, according to Tradeweb, down from 1.236% Wednesday. But ripple effects were felt elsewhere, with the 10-year German bond yield falling to 0.461% from 0.486%, and the 10-year U.S. Treasury yield slipping to 2.241% from 2.264%. Yields fall as bond prices rise.

Though not as much a focus for U.S. investors as the Federal Reserve or the European Central Bank, the BOE is still followed in part because of what it can signal about broad central bank trends. In June, BOE Gov. Mark Carney added to a selloff in global bonds when he said that a removal of monetary stimulus could be necessary if the economy improves, echoing similar comments by ECB President Mario Draghi.

Since then, however, central bank officials have worked to temper expectations of tighter policy, pointing to soft inflation among other factors.

In June, "central banks were putting out this pretty strong, coordinated hawkish message" but that message has since "become a little more diluted," said Shahid Ladha, head of strategy for G10 Rates Americas at BNP Paribas

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Treasurys also got a boost Thursday from a disappointing report on the U.S. service sector.

The Institute Supply Management said its nonmanufacturing index fell to 53.9 in July from 57.4 in June. That was below the forecast of 57.0 from economists polled by The Wall Street Journal. The employment component of the index also retreated, a day before the Labor Department is set to release its more closely watched monthly jobs report.

Economists surveyed by The Wall Street Journal expect Friday's report will show nonfarm payrolls rising by 180,000 in July and average hourly wages ticking up by 0.3%. Signs of accelerating wage growth could put pressure on bonds. Still, many analysts don't expect a big reaction to the report given the widely held view that the Fed won't raise interest-rates again until December at the earliest.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

August 03, 2017 11:12 ET (15:12 GMT)