U.S. Government Bonds Regain Strength After Selloff -- Update

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds strengthened Friday, extending weekly gains as investors took advantage of lower prices following a modest selloff on Thursday.

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The yield on the benchmark 10-year Treasury note settled at 2.352%, according to Tradeweb, compared with 2.361% Thursday and 2.397% last Friday.

Yields, which fall when bond prices rise, have declined this week as investors sold riskier assets such as stocks and high-yield corporate bonds and bought safer assets such as Treasurys.

Thursday marked a reversal of that trend, with yields climbing along with stocks. But investors were back to favoring Treasurys on Friday, keeping the 10-year yield firmly within the 2.3%-2.4% range that it has held to for most of the past two months.

"Yesterday's selloff was mercurial in that it surprised a few folks," and that has provided "an opportunity to buy," said Russ Certo, managing director of rates at Brean Capital LLC.

Some analysts attributed to Thursday's selling in bonds in part to the House passage of a far-reaching tax overhaul bill.

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Many investors and analysts said that Treasury yields would rise if such a bill became law, in part because it would boost the federal budget deficit, requiring the government to issue more bonds. A change in tax laws could potentially spur some economic growth, causing investors to favor riskier assets. It could also boost inflation, which is a main threat to government bonds because it chips away at the purchasing power of their fixed returns.

However, the bill still faces obstacles. No Democrats voted for the legislation in the House, and Republicans hold a narrow majority in the Senate, which is considering a somewhat different bill.

The debate over taxes is far from the only factor influencing Treasurys. In recent weeks, yields on longer-term bonds have been kept in check by relatively soft inflation data. The European Central Bank has also signaled plans to extend monetary stimulus deep into 2018, a policy that could continue to depress government bond yields in Europe and ensure steady demand for U.S. bonds from overseas investors seeking better returns than they can get at home.

At the same time, Federal Reserve officials have sent strong signals that the central bank will continue to raise interest rates at a gradual pace, setting a floor for short-term Treasury yields.

The Treasury Department has also indicated that, as the Fed buys fewer bonds in the months ahead, it will meet its additional borrowing needs by issuing more short-term debt than long-term debt. That decision has helped shrink the gap between the two-year Treasury yield and the 10-year yield to its lowest level in a decade.

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

(END) Dow Jones Newswires

November 17, 2017 16:42 ET (21:42 GMT)