U.S. Government Bonds Retreat as Equities Rebound

By Min Zeng 

        U.S. Treasury bonds pulled back on Tuesday as global stocks rebounded after Monday's selloff, and new government debt sales loom.
        The Federal Reserve starts its two-day policy meeting later Tuesday and is scheduled to release an interest-rate statement Wednesday afternoon. Investors will zero in on clues about whether the central bank may start raising benchmark short-term interest rates in September or wait longer to act.
        In recent trading, the yield on the benchmark 10-year Treasury note was 2.261%, compared with 2.228% on Monday, according to Tradeweb. Yields fall as prices rise.
        Investors had piled into ultrasafe U.S. government debt a day earlier, sending the yield on the benchmark 10-year Treasury note to a three-week low. The fresh rout in China's equity heightened concerns over the nation's slowing economy and sparked broad price slumps in U.S. and European stocks as well as commodities.
        Tuesday, China's stock market narrowed its price loss after a roller-coaster ride, and European stocks strengthened.
        A $26 billion sale of two-year Treasury notes is due at 1 p.m. Tuesday, the first leg of this week's new U.S. government debt offerings that focus on shorter-dated maturities.
        "China stocks held up pretty well overnight and we have supply the next few days," which sent Treasury bond yields higher, said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. "The Fed wants to move away from zero interest rates but the question is has anything derailed" the central bank's plan to tighten policy, he said.
        Investors had shed Treasury bondholdings in recent months as they were concerned that higher interest rates from the central bank would shrink the value of outstanding bonds.
        But the 10-year Treasury note's yield has fallen this month after rising to 2.48% a month ago, the highest closing level since September. A resumed selloff in commodities in July, along with concerns over China's stock markets, have renewed investors' appetites for haven assets.
        Plunging prices in commodities are clouding the global economic outlook and potentially complicating the Fed's policy adjustments. Weaker oil prices have reduced expectations about inflation, a main threat to longer-dated bonds. A market-based gauge of long-term U.S. inflation in the Treasury bond market traded near the lowest level in four months Tuesday.
        Fed-funds futures, used by investors and traders to place bets on central bank policy, showed Tuesday that investors and traders see a 21% likelihood of a rate increase at the September Fed meeting, according to data from the CME Group.
        The odds were 14% a month ago.
        Fed Chairwoman Janet Yellen earlier this month said lower energy prices were a temporary factor in holding down inflation and that she expects inflation to rise to the central bank's 2% target in the medium term. Ms. Yellen said an improving U.S. economy supports the Fed's plan to prepare for a rate increase later this year, though she added that she is monitoring international developments.
        U.S. jobs growth has been solid and the unemployment rate has plunged. Economists expect a government release later this week to show a 2.7% growth rate for the U.S. economy during the second quarter, rebounding from a 0.2% contraction between January and March.
        Money managers say they are not worried over a spike in the 10-year yield because the Fed's tightening this time would be shallow and slow, barring a big upside surprise from either the economic growth or wage inflation.
        Write to Min Zeng at min.zeng@wsj.com
        (END) Dow Jones Newswires

        July 28, 2015 09:38 ET (13:38 GMT)

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