BOND REPORT: Treasury Yields Fall As Dovish Comments From ECB's Draghi Fuel Bond Buying

Coming next week, investors will closely eye the Fed's policy meeting

Treasury yields extended their descent Friday, on track to extend a weeklong decline, as dovish comments from European Central Bank President Mario Draghi the previous day continued to draw investors into government paper.

The yield for the 10-year Treasury note lost 2.1 basis points to 2.239%. The 2-year note's yield edged lower by 0.4 basis point to 1.353%, while the 30-year bond, or the long bond, fell 1.9 basis point. Bond prices move inversely to yields.

Draghi's comments continued to weigh on Treasury yields after he said continued slack and weak inflation in the eurozone added risks to a premature exit of its bond-buying program. He said if economic data across the eurozone deteriorated, he could extend the bond-buying program (http://www.marketwatch.com/story/european-central-bank-leaves-rates-unchanged-focus-on-draghi-2017-07-20). But some investors say his deliberately dovish stance reflected a lack of options as the central bank runs out of assets to buy. Currency markets cast some doubt on just how dovish the central bank could actually be, driving the euro up sharply.

See: Nobody told the euro that Mario Draghi was dovish. (http://www.marketwatch.com/story/nobody-told-the-euro-that-mario-draghi-was-dovish-2017-07-20)

The 10-year German bund slipped 2.5 basis points to 0.505%, while the euro hit a two-year high (http://www.marketwatch.com/story/euro-sits-at-2-year-high-as-hawkish-view-on-ecb-dominates-2017-07-21).

"He clearly doesn't want financial conditions to tighten too much on expectations of policy changes," wrote Jennifer Lee, senior economist at BMO Capital Markets.

As for Friday, Treasurys enjoyed some modest buying overnight as the Reserve Bank of Australia played up its own dovish stance, with its deputy governor saying the bank would not "automatically" follow suit with other central banks' tightening.

Reports also said (http://www.marketwatch.com/story/trump-lawyers-discussing-pardons-ways-to-undermine-russia-probe-report-2017-07-20) President Donald Trump's lawyers were investigating how to undermine the special counsel inquiry led by former FBI Director Robert Mueller. The move drew a flight-to-safety bid as geopolitical concerns from the White House refuse to abate. Trump's pro-growth agenda has been sidelined as he struggles with allegations that members of his campaign team colluded with Moscow.

Looking ahead for next week, investors will closely eye the policy meeting for the Federal Open Market Committee, the Fed's interest-rate-setting body. Economists have downgraded expectations that the central bank announces the beginning of its balance sheet reduction this soon. Some said they did not expect changes to the policy language, but it could include tweaks to their current outlook for the economy.

"Some folks may think the Fed could alter their inflation language, but we think material changes will only help cement the markets' worry about inflation," said Tom Porcelli, chief U.S. economist for RBC Capital, said in a note to clients.

After Fed Chairwoman Janet Yellen testified to Congress mid-month, a runup has taken over in both bonds and stocks. The S&P 500 gained more than 40 points, while the 10-year yield has slipped more than 10 basis points. Yellen's note of caution over months of lackluster inflation has led investors to expect a slower pace of monetary tightening that could extend this "Goldilocks" environment that supports both assets.

Also read: Stock market and bonds rallied at the same time, and it's befuddling investors (http://www.marketwatch.com/story/bonds-and-the-stock-market-are-rallying-at-the-same-time-and-its-befuddling-investors-2017-06-02)

The economic data that would have otherwise supported expectations for higher core inflation have also come up short. Weak retail sales (http://www.marketwatch.com/story/us-retail-sales-fizzle-out-in-june-2017-06-14), falling import prices (http://www.marketwatch.com/story/falling-import-prices-show-that-barely-any-inflation-is-coming-into-the-us-from-abroad-2017-07-18)and a lower-than-expected reading on the home builders' index (http://www.marketwatch.com/story/builder-sentiment-stumbles-to-8-month-low-on-higher-lumber-costs-2017-07-18) have all taken a toll on inflation expectations.

(END) Dow Jones Newswires

July 21, 2017 11:41 ET (15:41 GMT)