U.S. Government Bonds Steady Ahead of Fed Decision

U.S. government bonds were bouncing around from gains to losses Wednesday following a large selloff Tuesday, as traders prepared for the Federal Reserve's latest policy statement.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.326%, according to Tradeweb. The yield logged its biggest one-day increase since March 1 on Tuesday, rising to 2.328% from 2.253% Monday. Yields rise when bond prices fall.

Fed officials are scheduled to release their policy statement at 2 p.m. EDT Wednesday. They are widely expected to keep monetary policy unchanged.

Officials, though, could signal when they plan to start shrinking the Fed's portfolio of Treasury and mortgage bonds -- a prospect that has caused jitters in the bond market following a two-week rally.

Investors "sort of reset everything" Tuesday, and "part of that reset had to do with some concerns that the Fed might use more forceful language today in terms of commencing balance sheet normalization," said John Herrmann, rates strategist at MUFG Securities in New York.

This week's turn toward higher yields is the latest twist for the Treasurys market, which has endured big swings over the past month.

Bonds sold off sharply at the end of June amid signs that major central banks outside of the U.S. were poised to start scaling aback stimulus programs. They then rallied as central bank officials in the U.S. and Europe turned a spotlight on a recent inflation slowdown, suggesting they would be cautious in tightening monetary policy.

Along with the Fed meeting, traders on Wednesday were keeping an eye on Congress, where the Senate is proceeding with a complicated effort to dismantle and possibly replace former President Barack Obama's 2010 Affordable Care Act.

Some investors see the legislative maneuvering as a test for whether Congress can ultimately pass tax cuts, which could lead to higher bond yields by boosting inflation and likely requiring more issuance of Treasurys unless lawmakers find another way of paying for the tax reductions.

Debt sales are also near-term concern for investors, with a five-year Treasury note auction scheduled for Wednesday afternoon, following a sale of two-year notes Tuesday. New debt sales sometimes weigh on the prices of outstanding bonds.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

U.S. government-bond prices rose Wednesday, rebounding from a previous-day selloff as buyers returned to the market after the Federal Reserve kept interest rates steady.

Bonds rallied after the central bank held course and officials issued a statement that some investors and analysts said offered few surprises.

Among relatively few updates to their previous statement, officials said they could start shrinking the Fed's large portfolio of bonds "relatively soon," as opposed to "this year." They also said inflation measures "are running below" their 2% target instead of "somewhat below" target, a tweak analysts said indicated slightly more concern about recently tepid inflation data and was supportive of bond prices.

The yield on the 10-year Treasury note dropped to 2.285% from 2.328% Tuesday, recovering after its largest one-day increase in nearly five months. Yields fall as prices rise.

"A variety of factors" caused long-term bond yields to rise Tuesday, "and now we're getting a reversal of that because we didn't get much from the Fed," said Subadra Rajappa, head of U.S. rates strategy at Société Générale SA.

This week's swings are just the latest in a series for the bond market.

Treasurys sold off sharply at the end of June amid signs that major central banks outside of the U.S. were poised to start scaling back stimulus programs. They then rallied as central-bank officials in the U.S. and Europe turned a spotlight on soft inflation, suggesting they would be cautious in tightening monetary policy.

Inflation is a main threat to government bonds, eroding the purchasing power of their fixed returns.

In addition to the Fed meeting, traders on Wednesday were keeping an eye on Washington, where the Senate is proceeding with a complex effort to overhaul the health-care system.

Some investors see the legislative maneuvering as a test for whether Congress can ultimately pass tax cuts, which could lead to higher bond yields by boosting inflation. Passing tax cuts could also force the government to issue more bonds, further weighing on the prices of outstanding Treasury debt.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

July 26, 2017 16:47 ET (20:47 GMT)