BOND REPORT: Treasury Yields Tick Lower To Start Week Packed With Key Economic Data

By Sunny Oh Features Dow Jones Newswires

A raft of economic data is set to be released this week

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Treasury yields inched slightly lower on Monday trade after a strong auction for 5-year notes helped to lift demand for government paper across the board, kicking off a week brimming with economic data that could influence the Federal Reserve's timetable for normalizing monetary policy.

The yield for the benchmark 10-year Treasury note posted a decline of 1.1 basis point to 2.159%, its lowest level since June 26. The 2-year Treasury note's yield ticked 0.4 basis point lower to 1.334%, while the 30-year bond's yield ended mostly flat at 2.751%. Bond prices move inversely to yields.

Treasury yields fell from intraday highs after an auction of $34 billion worth of 5-year notes attracted bidders, with money managers and indirect buyers, usually a proxy for foreign investors, taking down more than 82.5% of the issue, compared with an average of 71.7%.

While, dealers, or traders authorized to buy and sell government securities from the Federal Reserve, took down 17.5% of the notes, their smallest share on record. A smaller allocation to dealers can suggest that a broader array of investors are interested in the new issuance, noted Thomas Simons, senior money market economist for Jefferies.

Sales of government paper put additional inventory into Treasury markets, which can push prices lower and raise yields in the outstanding market. But when investors interest in an auction's bonds is unusually high, it can have the opposite outcome of pushing yields down.

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See: Demand for 5-year Treasury auction breaks records amid strong foreign demand (http://www.marketwatch.com/story/demand-for-5-year-auctions-break-records-amid-strong-foreign-demand-2017-08-28)

Before the influx of supply, investors digested an early reading of U.S. trade patterns, showing that the trade gap has widened by 1.78% to $65.1 billion July. Economists surveyed by MarketWatch had expected a trade deficit of $64.6 billion. Yet in a rather subdued session, investors also gave their attention to Hurricane Harvey as it flooded swaths of Texan territory and forced the closure of oil refineries on the Southeastern coast (http://www.marketwatch.com/story/dont-let-anyone-tell-you-hurricane-harvey-wont-damage-the-us-economy-2017-08-28).

Also read: U.S. trade deficit widens in July, advance report shows (http://www.marketwatch.com/story/us-trade-deficit-widens-in-july-advance-report-shows-2017-08-28)

Like Monday's muted action, Treasury yields spent much of last week treading water at the bottom of its range. Bond-buying drove yields for government paper lower on Friday, after Federal Reserve Chairwoman Janet Yellen steered away from any mention of the trajectory of interest-rate increases at the central banking get-together in Jackson Hole, Wyo., sparking a relief rally (http://www.marketwatch.com/story/treasury-yields-steady-as-investors-await-yellen-and-draghi-2017-08-25). But Treasury trading fluctuated in line with estimates of geopolitical concerns (http://www.marketwatch.com/story/trump-threatens-shutdown-over-border-wall-funding-predicts-end-of-nafta-2017-08-22) from the White House, which have kept bond investors on edge.

Strategists, however, expect clearer direction as investors head into a week packed with first-tier economic data. Traders will grapple with July's personal-consumption expenditures, the Fed's preferred inflation gauge, a revised reading for second-quarter GDP data and nonfarm payrolls for August set to be released on Friday. The raft of data could give senior Fed officials more information on the inflation outlook as they deliberate on the need for an additional rate increase this year.

But analysts suggested the impending wind-down of the Fed's $4.5 trillion of government bonds and mortgage-backed securities--widely anticipated for a September announcement--would proceed even if August's jobs report comes in lower than expected.

"A disappointing payrolls reading could be cited by some Fed officials as a reason to hold off on balance sheet normalization, but most officials will probably be skeptical of a slowing signal," wrote Jim O' Sullivan, chief U.S. economist for High Frequency Economics.

And some central bankers feel low U.S. inflation is no reason to pause on the Fed's plans to introduce another rate increase in 2017. Cleveland Fed President Loretta Mester, a monetary hawk and a nonvoting member, said on Sunday the central bank should continue to gradually normalize interest rates, citing the strength in labor markets, in an interview with the Financial Times (https://www.ft.com/content/fdeb18cc-8b3f-11e7-a352-e46f43c5825d).

"I am not in the camp that we have to see inflation rise to 2 percent before we take the next move," she said.

Elsewhere, the yield for the German 10-year government bond, also known as the bund, was mostly unchanged at 0.376%. European Central Bank President Mario Draghi underlined the need for further monetary accommodation (http://blogs.marketwatch.com/capitolreport/2017/08/25/jackson-hole-fed-conference-live-blog-yellen-draghi-on-tap/?mod=MW_story_latest_news)despite a firming recovery in the eurozone at the Jackson Hole economic symposium, leaving the bund hovering at its lowest levels since June.

(END) Dow Jones Newswires

August 28, 2017 16:24 ET (20:24 GMT)