BOND REPORT: Treasury Yields Steady, But On Track To End July Lower

U.S. Treasury yields held steady early Monday, but were mostly on track to log declines in the last trading day in July--a month marked by repeat records for equities and growing expectations the pace of U.S. Federal Reserve rate increases will be hampered by slothful inflation.

The yield on the benchmark 10-year Treasury note ticked 0.4 basis point higher at 2.295%, compared with 2.291% late in New York on Friday. The yield on the 2-year note also inched up 0.4 basis point at 1.355%, versus 1.351% late Friday. The yield on the 30-year Treasury bond added 0.8 basis point at 2.903%, compared with 2.895% in the prior session.

Bond prices move inversely to yields.

Traders said that sentiment in Treasurys has been focused on a lack of progress on President Donald Trump's pro-growth agenda as efforts last week to repeal and replace Obamacare failed in the Senate.

Thomas Simons, senior money market economist at Jefferies said that fact and concerns about the ability of the government to strike an agreement to raise the debt ceiling are underpinning moves for haven Treasurys.

"The failure of the Senate to reach agreement on any of the sundry health care proposals reinforced the growing perception of the inept state of affairs in D.C. and appeared to signal the death knell for fiscal stimulus in 2017. The collision of a binding debt ceiling and the need to pass a budget for [full year 2018] promises to make for a chaotic and frustrating September on Capitol Hill," Simons wrote in a July 28 research note.

For the month, yields for both the 2-year and 10-year notes added 6 basis points, while the 30-year Treasury, known as the long bond, has slipped more than 3 basis points.

Yields across the curve fell slightly on Friday after data showed second-quarter gross domestic product accelerated to a 2.6% annual pace, below the consensus forecast of 2.8% by economists polled by MarketWatch. While the number is more than double the revised 1.2% pace seen in the first quarter, it leaves the U.S. economy on a tepid expansion path.

Treasury buyers have been particularly focused on the tepid pace of inflation, which has mostly helped to support bond buying, nudging yields lower. Rising inflation can have a corrosive influence on a bond's fixed value.

Some market participants interpreted the Fed's most recent policy statement last Wednesday, which adjusted its language to indicate that a reduction of its $4.5 trillion balance sheet would occur "relatively soon," compared with "this year" as a tacit acknowledgment by the U.S. central bank that weak inflation and other economic reports may delay its plan to normalize interest rates.

Looking ahead, investors are awaiting a report on manufacturing activity in the Chicago area, the Chicago purchasing managers index for July, due at 9:45 a.m., and pending-home sales for June set for 10 a.m. Eastern.

Activity in bonds came against the backdrop of an S&P 500 index and the Dow Jones Industrial Average poised to rise to all-time highs (http://www.marketwatch.com/story/us-stocks-poised-to-squeeze-in-a-gain-as-strong-july-closes-out-2017-07-31). Gains in stocks, often perceived as risk assets, tend to weigh on haven Treasurys.

Elsewhere, the German 10-year benchmark bond known as the bund, was at 0.55%.

In exchange-traded action, a popular bond fund, iShares 20+ Year Treasury Bond ETF(TLT), was set to end the week 1% lower but were up 4% so far in 2017.

(END) Dow Jones Newswires

July 31, 2017 09:17 ET (13:17 GMT)