U.S. Government Bonds Rebound on Strong Auction

Prices of U.S. government bonds got a boost from a strong 30-year bond auction, recouping an earlier bout of selling driven by a wholesale inflation reading that rose to a five-year high.

The yield on the benchmark 10-year Treasury note settled at 2.206%, compared with 2.215% Monday. Yields fall as bond prices rise.

The 10-year yield fell for the first time in five sessions and traded near this year's low of 2.147% set on June 6.

The price swing came as the Federal Reserve started its two-day monetary policy meeting. Policy makers are scheduled to release an interest-rate statement Wednesday afternoon, followed by a press conference from Fed Chairwoman Janet Yellen.

Investors expect the central bank to raise short-term interest rates a fourth time since the 2008 financial crisis. The key question is whether the Fed may raise rates one more time later this year as projected in March or stand pat, which would impact investors' wagers on Treasury bonds and other markets.

The $12 billion sale of 30-year Treasury bonds drew the highest demand since March. The sales of three-year and 10-year notes on Monday also attracted solid buying interest home and abroad.

The results surprised some bond traders and investors who had thought that demand could soften due to a jammed auction schedule and a looming expected rate increase from the Fed.

Some money managers say the auctions underscore again U.S. government bonds' attractiveness in a low yield world, which many investors have cited as one factor that reduces the risk of a sharp rise.

"With global bond yields so low, it keeps U.S. bond yields from rising too quickly," said Brett Wander, chief investment officer of fixed income at Charles Schwab Investment Management. "This factor continues to remain in place."

U.S. bonds are a bargain in the developed world. The 10-year German bund yielded only 0.265% Tuesday, the 10-year government bond in Japan yielded 0.069% and the 10-year U.K. gilt yielded 1.033%, according to Tradeweb.

A massive pool of negative-yielding government bonds in Japan and Europe driven by unconventional bond-buying monetary stimulus highlights global investors' struggle to get income and drives money flowing into Treasurys.

The amount of global negative-yielding sovereign debt outstanding rose substantially to $9.5 trillion as of May 31, from $8.6 trillion on March 1, according to a report from Fitch Ratings Tuesday.

Traders say Treasury auction results also reflect a view in the bond market that after a possible rate increase this month, the Fed could hold off raising rates further during the second half of this year.

Recent reports showing slowing inflation pressure have bolstered speculation that the Fed would be slow in raising rates. The Fed likely starts the process of unwinding its balance sheet later this year, and some investors see this as a substitute for rate increases.

Some analysts warn that bond yields could rise if the Fed disappoints those who are looking for a more cautious tone from the central bank.

"The bond market is underestimating the Fed's desire to raise rates," said Scott Clemons, chief investment strategist at Brown Brothers Harriman. He still expects the Fed to raise rates one more time later this year after a move in June.

The 10-year Treasury yield had risen to 2.227% earlier Tuesday after the producer-price index for final demand excluding food and energy grew 0.3% in May from the prior month. Economists had expected a 0.1% gain. From a year earlier, those core prices were up 2.1%, the strong gain since May 2012.

The data was a departure from recent releases showing slowing inflation.

The consumer-price index due Wednesday morning will be highly scrutinized by investors. The CPI excluding food and energy fell below the Fed's 2% target in April on an annualized base.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

June 13, 2017 16:00 ET (20:00 GMT)