U.S. Government Bonds Strengthen

The U.S. government bond market strengthened Tuesday for a second consecutive session, offering some tentative signs of stabilization following a two-week selloff.

The main boost for bonds Tuesday were emails released by Donald Trump Jr., the eldest son of the U.S. president, which showed he attended a meeting in June 2016 to discuss allegedly incriminating information about Hillary Clinton.

The release of the emails, following days of news reports, offers clear evidence that senior officials in the Trump camp entertained offers of Russia's help in last year's campaign.

"The more bad news for the Trump administration, the less likely [the president] will be able to get any of his [pro-growth] policies enacted, " said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson.

The yield on the benchmark 10-year Treasury note settled Tuesday at 2.362%, compared with 2.371% Monday. Yields fall as bond prices rise.

U.S. bond yields posted a big increase late last year, driven by expectations that large fiscal stimulus would lead to stronger growth and higher inflation, factors that would cause the value of haven bonds to fall. But the so-called reflation trade via higher bond-yield wagers has pulled back this year, contributing to bond yields' slides in recent months.

The mild price strength in the bond market suggests many investors are hesitating to place big bets either way before Federal Reserve Chairwoman Janet Yellen's semiannual testimony before Congress Wednesday, said some analysts.

The U.S. consumer-price index report for June is scheduled to be released this Friday, a key data point this week to influence investors' bets on bond yields.

The 10-year Treasury yield had risen to 2.395% earlier Tuesday, weighed down by new debt supply on both sides of the Atlantic.

The U.K. and the Netherlands sold long-term bonds. In the U.S., a $24 billion sale of three-year notes was sold Tuesday afternoon, to be followed by a $20 billion sale of 10-year notes Wednesday and a $12 billion sale of 30-year bonds Thursday.

The three-year note auction drew decent demand, a sign the recent selloff has turned Treasurys into attractive bargains for some investors.

Investors are debating whether bond yields may continue to rise or, like many episodes in the past few years, the selling pressure will eventually fade.

The recent selloff in the global government bond market was driven by anxiety that a broad improvement in the global economy may allow major central banks to pull back ultra loose monetary stimulus. Easy money policy has played a big role driving up government bond prices to historically high levels following the financial crisis.

Worries over the European Central Bank to taper bond buying have in particular been growing. The Bank of Canada is widely expected on Wednesday to raise its benchmark policy rate for the first time in seven years.

Meanwhile, inflation, which is a big threat to long-term government bonds, remains subdued. Over the past few months, U.S. reports have showed inflation pressure slowed down, with some indicators falling below the Fed's 2% target.

Ms. Yellen has shrugged off recent softening inflation readings as temporary. Some money managers are skeptical over her inflation assessment.

The recent bond market selloff "is overdone," said Kevin Giddis, head of fixed-income capital markets at Raymond James. "The ECB will continue to buy bonds, and inflation will continue to be a problem for the U.S. Yields will fall again."

The 10-year yield remains below the 2.446% settled at the end of 2016.

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

(END) Dow Jones Newswires

July 11, 2017 16:04 ET (20:04 GMT)