U.S. Government Bonds Strengthen on Last Trading Day of 2017

By Gunjan Banerji Features Dow Jones Newswires

U.S. government bonds strengthened on the last trading day of the year, with the yield on the benchmark 10-year U.S. Treasury note on track to end 2017 roughly where it began.

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The 10-year yield fell to 2.414%, according to Tradeweb, from 2.432% on Thursday and where it ended last year at 2.446%. Bond prices rise as yields fall.

Friday's moves likely included investors adjusting positions before the start of 2018 in thin trading, analysts said. Pension funds and other asset managers could be rebalancing their portfolios before the end of the year.

The 10-year Treasury yield darted higher earlier in December as U.S. lawmakers passed a tax overhaul and the Federal Reserve raised rates for the third time this year. Lower tax rates could lead to a higher government deficit that would have to be funded by borrowing, which could increase the supply of Treasurys.

Tax cuts could also spur growth and inflation, which is a threat to the value of longer term government bonds because it erodes the purchasing power of their fixed payments.

Yields have retreated in recent sessions as the end of the year approached. Instead of betting directly on Treasurys rising or falling, some investors have recently traded the changes in yields between government bonds with different maturities, analysts said.

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That can involve selling shorter-dated Treasury bonds and buying longer-dated ones, which can compress the gap between longer-dated and shorter-dated government bonds. The difference between yields on Treasurys maturing in five years and 30 years narrowed Thursday to the lowest level in about a decade, according to data from Ryan ALM.

With inflation pressures relatively muted, some analysts see little reason for the 10-year yield to break out of the relatively narrow range in which it has traded recently.

"The 10-year is going to trend back to 2.4%," said Jim Vogel, an interest rates strategist at FTN Financial. "That's where people feel comfortable."

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

December 29, 2017 13:36 ET (18:36 GMT)