A bout of selling hit the U.S. government bond market Tuesday as investors hedged their bets ahead of the conclusion of the Federal Reserve's two-day policy meeting.
Bond prices dropped at the start of trading in Europe and continued falling for most of the U.S. trading session without much of a catalyst to spark the move.
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The selling sent the yield on the benchmark 10-year Treasury note to 2.328% from 2.253% Monday, marking its largest one-day increase since March 1. Yields rise when bond prices fall.
After two weeks of gains, investors and analysts said the time was probably right for a pullback in the market, especially as the Fed prepares to make its latest policy statement on Wednesday.
Small to moderate selloffs heading into Fed decisions have happened often recently, as the central bank has begun to slowly raise interest rates.
In this case, investors don't expect the central bank to lift rates. But the central bank could set a date for when it will start unwinding its balance sheet -- a move that, while not a big surprise, would signal a level of confidence in the economy and a willingness to pursue tighter monetary policies.
"If they go ahead and announce the actual date, even if it's October, that would indicate that they must have learned something," said Jim Vogel, interest-rates strategist at FTN Financial.
Other factors also weighed on Treasurys. Strong corporate earnings and a move higher in oil prices helped push up U.S. stocks and sap demand for haven bonds. There was also a $26 billion sale of two-year notes, the first of three auctions this week.
The combination of a Fed meeting and new debt supply "tends to push customers to the sideline and maybe get people a little nervous," said Ray Remy, head of fixed-income trading in New York at Daiwa Capital Markets America Inc.
This week's turn toward higher yields is the latest twist for the Treasury market, which has endured big swings over the past month.
Toward the end of June, bonds sold off sharply amid signs that major central banks outside of the U.S., such as the European Central Bank and the Bank of England, were poised to start scaling back stimulus programs.
After spending two weeks climbing higher, yields proceeded to fall almost as hard as central bank officials on both sides of the Atlantic suggested they would be cautious about tightening monetary policy in the face of soft inflation data.
Though occasionally influenced by political developments, investors say that the fate of the Treasurys market largely comes down to economic data. If inflation picks up, it would present a clear path for the Fed to keep raising interest rates, likely pushing the 10-year yield back toward its 2017 high of around 2.6%.
If inflation remains stuck below the Fed's 2% annual target, many investors expect yields to either fall or stay around current levels.
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(END) Dow Jones Newswires
July 25, 2017 15:53 ET (19:53 GMT)