U.S. Government Bonds Strengthen on Weak Auto Sales

By Min ZengFeaturesDow Jones Newswires

U.S. government bonds strengthened Tuesday and recouped earlier price declines as weak auto sales boosted demand for haven assets.

Large auto makers General Motors Co. and Ford Motor Co. reported declines of 5.8% and 7.1% respectively, compared with the same month last year.

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"It is an indication of a slowdown in domestic economic growth and consumption," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.314%, according to Tradeweb, compared with 2.327% Monday. Yields fall as bond prices rise.

The 10-year yield had risen to 2.34% earlier in the session, driven by an index measuring the health of the U.K. manufacturing sector reached the strongest level in three years.

The Federal Reserve starts its two-day policy meeting Tuesday and is expected to release an interest-rate statement Wednesday afternoon.

The central bank is widely expected to keep its key short-term policy rate unchanged after raising it by a quarter of a percentage point in March. Investors will zero in on the Fed's signals regarding a rate increase next month.

A number of disappointing economic releases in recent weeks have raised some concerns over the U.S. growth momentum, a fodder for the Fed to be cautious.

Friday's report showed the U.S. economy grew at the slowest pace in three years. On Monday, a report showed a gauge of the U.S. manufacturing pulled back. The Federal Reserve's favorite gauge of inflation released Monday retreated, pointing to deceleration of inflation pressure.

"The Fed will have a challenge on its hands in terms of raising rates until the economic fundamentals improve," said Kevin Giddis, head of fixed-income capital markets at Raymond James.

Financial conditions, on the other hand, remain loose, which supports the Fed's case in tightening monetary policy further.

U.S. stocks were near record highs. Both Treasury bond yields and the U.S. dollar have retreated from their 2017 peak. The 10-year Treasury yield traded above 2.6% in mid-March. The yield premium investors demanded to own U.S. junk bonds relative to Treasurys remain near the tightest since 2014.

All suggest the financial markets could cope with another moderate rise in short-term interest rates.

Fed-funds futures, used by investors to bet on the Fed's rate outlook, showed Tuesday a 70% probability that the Fed would tighten monetary policy again in June, according to CME Group.

John Canavan, market analyst at Stone and McCarthy Research Associates, said he still expects the Fed to raise rates in June as he believes the U.S. growth was in a temporary soft path during the first quarter.

"I don't think the Fed would be terribly concerned about the weak first quarter," said Mr. Canavan. He added that in recent years, a weak first quarter growth was followed by a rebound during the second quarter.

Friday's nonfarm employment report is the key datapoint for investors to gauge the growth outlook. Economists expect the U.S. economy added 188,000 new jobs in April, up from 98,000 in March. Wage inflation, via the average hourly earnings from the jobs report, will also be scrutinized on the inflation outlook.

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

(END) Dow Jones Newswires

May 02, 2017 11:10 ET (15:10 GMT)