Treasurys Extend Gains After Strong 5-Year Note Auction

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds were little changed Monday, holding their gains from Friday when Federal Reserve Chairwoman Janet Yellen relieved some pressure on the market by largely avoiding discussion of monetary policy in a speech at the Fed's annual Jackson Hole, Wyo., conference.

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In recent trading, the yield on the benchmark 10-year Treasury note was 2.168%, according to Tradeweb, compared with 2.169% Friday. Yields fall when bond prices rise.

Yields on longer-term Treasury bonds have been unusually steady in recent months, with the yield on the 10-year note as of Friday holding to its narrowest 90-day range since 1972, according to WSJ Market Data Group.

Heading into the Jackson Hole conference last week, investors and analysts had speculated that Ms. Yellen could use occasion to change 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.

Trading volume was light early Monday. Markets in the U.K. were closed in observance of a public holiday, and some U.S. traders were also away ahead of the Labor Day weekend, analysts said.

It is looking like another "very quiet trade" this week, though lower trading volumes could "make for increased volatility," said John Canavan, market analyst at Stone and McCarthy Research Associates.

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Investors will initially be occupied this week by Treasury-debt auctions. A $26 billion sale of two-year notes and a $34 billion auction of five-year notes will take place Monday, while a $28 billion auction of seven-year notes will occur Tuesday. Later, investors' attention is expected to shift to economic data, with Fed's preferred gauge of inflation reported Thursday and monthly jobs data scheduled to be released Friday.

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

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

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.

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)