Shorter-Dated Government Bonds Slip After U.S. Data

By Cynthia Lin 

        U.S. Treasurys with shorter maturities slipped Friday as a pair of upbeat economic reports is likely keep the Federal Reserve on track to start tightening policy this year.
        In early New York trading, two-year notes fell 1/32 to yield 0.682%, according to Tradeweb. Benchmark 10-year notes were flat to yield 2.351%, while five-year notes lost 4/32 to yield 1.679%. Bond yields fall when prices rise.
        The declines came after a report from the Commerce Department showed a larger-than-expected number of homes breaking ground in the U.S. last month. A separate release showed an uptick in inflationary pressure, with the consumer-price index posting its first annual gain this year.
        The 30-year bond, however, remained an outlier, extending gains to rise 24/32 in price to yield 3.079%.
        Bond analysts point to the general lack of inflation around the world supporting longer maturities, and the fact that the Fed seems keen on raising rates only very gradually once the tightening process begins. In her testimony before lawmakers this week, Fed Chairwoman Janet Yellen reiterated the central bank's preference to tighten at a measured pace.
        "Investors appear to have taken Yellen's suggestion that the Fed prefers to hike rates earlier but slower as an indication that inflation will remain under control over the medium term--a factor that should remain highly beneficial for long bonds," said Gennadiy Goldberg, a U.S. rates strategist at TD Securities.
        The mix of lower long-term yields and rising short-end yields has supported a popular trade this year: a flatter Treasury yield curve. The gap between 2- and 30-year yields shrank to 2.40 percentage points, its lowest in a month.
        Bond traders point to other factors underpinning demand for longer-dated Treasurys, including ongoing concerns about China's economy and Greece's financial health, even though both situations have stabilized this week. While Greece's parliament has voted to accept the harsh terms required to receive another round of financial aid, economists warn the process of executing those reforms remain rife with risk.
        Those global concerns are expected to keep monetary policy at other major central banks accommodative. The European Central Bank remains committed to its bond-buying program and the People's Bank of China to its stimulus efforts, while the Bank of Canada recently cut rates.
        Those easing efforts, in contrast to the Fed being poised to tighten, has made U.S. government bond yields relatively more attractive, a factor that bond traders will likely keep any Treasurys selloff in check. U.S. 10-year notes yield about 1.6 percentage point more than comparable German bunds and even some 0.4 percentage point more than comparable Italian bonds.
        Write to Cynthia Lin at cynthia.lin@wsj.com
        (END) Dow Jones Newswires

        July 17, 2015 09:25 ET (13:25 GMT)

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