Treasurys Extend Gains After Strong 5-Year Note Auction

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds extended recent gains Monday, as strong demand for new five-year notes carried over into the broader market.

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In a fairly unusual development, auctions of two-year Treasury notes and five-year Treasury notes were both held Monday. Though investor appetite was muted for the two-year notes, it picked up for the five-year notes, with bids totaling more than 2.5 times the $34 billion being auctioned.

Subsequent demand for Treasurys caused the yield on the benchmark 10-year note to settle at 2.159%, down from 2.173% just before the second auction and 2.169% Friday. Yields fall when bond prices rise.

Sales of Treasury notes can sometimes weigh on prices of outstanding bonds as the market is forced to absorb the new debt.

After Monday, traders still need to deal with a $28 billion auction of seven-year notes on Tuesday. But the fact of "two-thirds of this week's supply being over with" was enough to prompt a "little bit of a relief rally," said Daniel Mulholland, head of U.S. Treasury trading at Crédit Agricole.

Treasurys came into this week with momentum.

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Before Friday, investors and analysts had thought there was a small chance that Federal Reserve Chairwoman Janet Yellen, in a speech at Jackson Hole, Wyo., could challenge the prevailing view among investors that the Fed is unlikely to raise interest rates for a third time this year following a run of soft inflation data. Instead, she focused her remarks on financial regulation, removing what had been one of the few clear risks to the market.

While holding to a narrow range, yields on longer-term Treasury bonds have slowly pushed lower in recent weeks, bringing the 10-year yield near its lowest close of the year: 2.135% set on June 26.

The Fed is expected to start reducing its large portfolio of Treasury and mortgage-backed securities in the fall. Still, many investors think the process will be slow enough that it will have little impact on the market. Meanwhile, the persistence of low inflation has gradually lowered expectations for higher interest rates.

Some major economic data this week has the potential to jolt the bond market out of its recent doldrums. The Fed's preferred gauge of inflation is scheduled to be released Thursday, followed a day later by monthly jobs data that includes a closely watched measure of wage inflation.

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

(END) Dow Jones Newswires

August 28, 2017 16:27 ET (20:27 GMT)