U.S. Government Bonds Strengthen on Larger Drop in Durable Goods Orders

U.S. government bonds strengthened Monday, with the yield on the benchmark 10-year note dipping below this year's closing low level, as a larger-than-forecast decline in a gauge of U.S. business investments added to questions on U.S. economic growth momentum and stoked demand for haven assets.

The yield on the benchmark 10-year Treasury note was 2.133%, according to Tradeweb, compared with 2.146% Friday. The yield's closing low this year was 2.138% on June 14.

Yields fall as bond prices rise.

Supply pressure contains the bond market's strength. A $26 billion sale of two-year notes is due at 1 p.m. EDT on Monday, the first leg of this week's new Treasury note offerings.

Orders for durable goods -- products designed to last at least three years, such as computers and industrial robots -- decreased 1.1% from April, the largest drop in six months. Economists had expected a 0.4% decline.

The report raised some investors' skepticism that the Federal Reserve could carry out another interest rate increase during the second half of this year.

"The economic data continues to disappoint and is making the bond market very skeptical of any more rate hikes in the near future," said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc.

Higher interest rates from the Fed reduce money flowing into the broader economy and tend to shrink the value of outstanding U.S. government bonds.

Yet the 10-year Treasury yield has fallen this year even as the Fed has raised interest rates three times since December. The 10-year yield traded at 2.446% at the end of last year.

Lower long-term bond yields reflect the Fed's limits in influencing the bond market. Yields on short-term debt are more sensitive to the Fed's policy rate changes. The yield on the two-year note was little changed at 1.345% Monday and traded near its 2017 high.

A number of factors have sent the 10-year yield lower this year: skepticism over President Donald Trump's capability to push through his fiscal agenda; questions toward how robustly the U.S. economy has been expanding after a soft patch during the first three months of the year; slowing inflation readings over the past few months despite signs of the labor market approaching full employment.

On top of that is global investors' continued thirst for income in a low yield world. U.S. Treasury bonds offer more attractive yields than many of its peers in the developed world.

Fed Chairwoman Janet Yellen said earlier this month that soft inflation data could be noisy and that a robust labor market may eventually lead to higher inflation.

Some money managers aren't buying the Fed's inflation outlook. Convinced that inflation may continue to move lower, they have been buying long-term government debt. Inflation is the big threat to long-term government debt as it chips away investors' purchasing power over time from their fixed income investments.

Ms. Yellen is scheduled to speak Tuesday and investors will scrutinize any changes from her stance on inflation and growth.

Some analysts caution that the bond market may be underestimating the Fed's desire to raise interest rates.

"The Fed knows that at some point they need to lower interest rates again in response to an economic slowdown," said Scott Clemons, chief investment strategist at Brown Brothers Harriman. "By raising rates now, this gives them some room when they cut rates."

While few investors expect a downturn any time soon, they recognize that this expansion cycle -- already the third longest in the U.S. history -- is aging.

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

(END) Dow Jones Newswires

June 26, 2017 11:19 ET (15:19 GMT)