TLT iShares 20 plus Year Treasury Bond

By Sunny Oh

Treasury traders will await the FOMC statement on Wednesday for signs of how the central bank is processing weak economic data

Treasury yields climbed Monday as traders braced for a Federal Reserve policy meeting starting Tuesday that could help to provide further clarity on the central bank's approach to tackling sluggish inflation and scaling back its $4.5 trillion asset portfolio.

The yield on the 30-year bond added 3.1 basis points to 2.833%, ending a six-day streak of declines. The yield on the 10-year Treasury note rose 2.1 basis points to 2.253%, while the 2-year note's yieldgained 2.1 basis points to 1.365%.

In particular, long-dated Treasury yields came under selling pressure, pushing yields, which move inversely to prices, higher as investors took money off the table following a two-week surge in government-bond prices, on the back of a wave of lackluster economic data and dovish central bank speeches. Hundreds of millions of dollars left from the largest exchange-traded fund tracking long-dated Treasurys(TLT) in the week ending July 21 (http://www.marketwatch.com/story/investors-withdraw-from-long-dated-treasurys-etf-2017-07-24).

Although market participants expect few changes (http://www.marketwatch.com/story/stocks-brace-for-volatility-as-earnings-peak-weak-fed-meeting-loom-2017-07-22) to the language of the coming updated policy statement, they will closely watch for indications that weakening data have unnerved members of the Federal Open Market Committee. That said, the central bank tends to be reluctant to make major tweaks to policy language on FOMC meetings without a corresponding news conference.

"The economy definitely seems to be shifting into lower gear, whether the Fed chooses to amend the statement and address some of those problems, this could move the market," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson.

Adding to the downbeat reports, the International Monetary Fund on Sunday lowered its U.S. growth forecast for 2017 to 2.1% from 2.3% as economists cut their expectations for President Donald Trumps's pro-growth agenda. The president's one-two-three punch of tax cuts, deregulation and infrastructure spending, were the signature pledges that helped to get him into the Oval Office and which weighed on Treasurys, initially jolting yields firmly higher back in November. But the failure to overhaul the Affordable Care Act, known as Obamacare, has cast doubt on his ability to leverage from a Republican majority on Capitol Hill and push through other legs of his legislative agenda.

This reflected that "fiscal policy will be less expansionary going forward than previously anticipated," according to their World Economic Outlook update (http://www.imf.org/en/Publications/WEO/Issues/2017/07/07/world-economic-outlook-update-july-2017).

See: IMF cuts U.S. growth forecast for 2017, 2018 (http://www.marketwatch.com/story/imf-cuts-us-growth-forecast-for-2017-2018-2017-07-24)

Despite the muted backdrop, many still expect the Fed to signal its plans to reduce its balance sheet starting as early as September, even as it pushes back the schedule for normalizing interest rates. Though the tapering of the Fed's asset portfolio has caused some jitters about the potential impact (http://www.marketwatch.com/story/will-the-feds-balance-sheet-unwind-catch-investors-by-surprise-2017-05-03) on the Treasury market, the gradual pace of the roll-off is unlikely to trigger investors' flight from the largest market for government paper in the world, said some analysts. A reduction in the central bank's asset portfolio, accumulated during the 2008-'09 financial crisis, can also serve to raise borrowing costs, tightening lending conditions on Wall Street.

Read:Jamie Dimon says QE unwind could catch investors by surprise (http://www.marketwatch.com/story/jamie-dimon-says-qe-unwind-could-catch-investors-by-surprise-2017-07-11)

"The FOMC appears to have put rate normalization on the back burner for the time being," wrote Ward McCarthy, chief financial economist for Jefferies.

On the data front, existing-home sales for June came in at an annual rate of 5.52 million (http://www.marketwatch.com/story/existing-home-sales-fall-in-june-as-market-retrenches-after-hot-spring-season-2017-07-24), the lowest pace since February, missing an average forecast of economists polled by MarketWatch of 5.58 million.

Looking ahead, the Treasury Department is slated to sell $88 billion of U.S. government paper in tenors ranging from 2 years to 7 years.

Elsewhere, the German 10-year bond yield was at 0.51%. German bond yields slipped last week after European Central Bank President Mario Draghi's dovish remarks caused the euro to surge above $1.16, moving investors out of equities and into eurozone sovereign debt (http://www.marketwatch.com/story/treasury-yields-fall-as-dovish-comments-from-ecbs-draghi-fuel-bond-buying-2017-07-21).

(http://www.marketwatch.com/story/treasury-yields-fall-as-dovish-comments-from-ecbs-draghi-fuel-bond-buying-2017-07-21)

(END) Dow Jones Newswires

July 24, 2017 17:16 ET (21:16 GMT)

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