BOND REPORT: Treasurys Pare Gains After Senate Tax-bill Optimism Edges Out White House Turmoil

Treasury prices gave back some of their early gains, still leaving yields lower, on Friday after growing optimism that the Senate tax bill was nearing passage.

The push to implement a tax overhaul helped to shift investor's focus away from a news report saying former national security adviser Michael Flynn, who took a plea deal in the Russian meddling case, will testify about President Donald Trump.

What are yields doing?

The 10-year benchmark note yield shed 5.4 basis points to 2.363%, but was nonetheless up 2.1 basis points this week. The 2-year Treasury note yieldwas down a single basis point to 1.778%, but up 2.6 basis points this week.

The 30-year bond yield fell 7.5 basis points to 2.72%, but was mostly unchanged in the past five days.

Bond prices move in the opposite direction of yields.

What's driving Treasurys?

ABC News reported that Flynn will testify about Trump as part of a larger probe conducted by Special Counsel Robert Muller into the Trump election campaign's ties with Moscow. Flynn had pleaded guilty on Friday to making false statements to the FBI (http://www.marketwatch.com/story/michael-flynn-charged-with-lying-to-fbi-about-russian-ambassador-conversations-2017-12-01)about his contact with Russia.

Analysts said the political fallout is prompting investors to take risk off the table as they see what Flynn's testimony spells for Trump's pro-growth agenda. Market participants switched out of stocks (http://www.marketwatch.com/story/us-stocks-turn-lower-following-reports-flynn-will-testify-about-trump-2017-12-01)into assets perceived as safe, like bonds.

See: Former Trump national-security adviser Michael Flynn pleads guilty to lying to FBI (http://www.marketwatch.com/story/former-trump-national-security-adviser-michael-flynn-pleads-guilty-to-lying-to-fbi-2017-12-01)

Senate Majority Leader Mitch McConnell said Republicans had the votes to pass the Senate tax bill, adding that a final vote will arrive at the floor "later today." A deficit-widening tax bill will push the Treasury Department to increase the size of their debt auctions, which could be bearish for government paper.

Read: Here's what's next for the Senate's tax bill (http://www.marketwatch.com/story/heres-whats-next-for-the-senates-tax-bill-2017-11-30)

What did market participants say?

"I think that it's so hard to see how the [Russia investigation] evolves. But given the risk rally we've seen this week, we're going risk-off. If you look at the week itself, we're still probably higher on stocks, certainly the [ABC news report] is giving investors much to digest," said Marvin Loh, senior fixed-income strategist at BNY Mellon.

Even after the knee-jerk plunge in stocks, the S&P 500 and the Dow Jones Industrial Average is still higher overall for the week.

What else is on investors' radar?

The Institute for Supply Management said November's manufacturing composite index, a measure of nationwide industrial activity, fell to a nonetheless strong reading of 58.2% (http://www.marketwatch.com/story/us-manufacturers-roar-ahead-ism-shows-2017-12-01). Economists surveyed by MarketWatch had forecast 58.

New York Fed President William Dudley said introducing fiscal stimulus amid strong growth and low unemployment was "probably not the best time," (http://www.marketwatch.com/story/feds-dudley-sees-no-need-for-fiscal-stimulus-at-time-of-solid-growth-2017-12-01) he said. St. Louis Fed President Jim Bullard said the yield curve, a line tracing Treasury maturities against their yields, was at risk of inverting (http://www.marketwatch.com/story/feds-bullard-warns-yield-curve-could-invert-next-year-2017-12-01) next year, considered a precursor to a recession.

(END) Dow Jones Newswires

December 01, 2017 15:52 ET (20:52 GMT)