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U.S. Government Bonds Weaken Amid Thin Trading12-28-17 4:36 PM EST
By Daniel Kruger 

U.S. government bonds weakened amid thin trading and scant demand at the tail end of a surprisingly strong year for fixed-income.

The yield on the benchmark 10-year U.S. Treasury note rose to 2.423% from 2.412% Wednesday, snapping a two-day streak of declines. Bond prices fall as yields rise.

After three Federal Reserve rate increases, the 10-year yield remains near the 2.446% level at which it ended 2016, though the two-year yield is at 1.911%, the highest since September 2008, leaving investors split about the likely direction of yields next year.

The Fed has forecast it will raise rates three more times in 2018 and twice in 2019, as it says it intends to prevent inflation from gaining a foothold in the economy.

With investors increasingly confident that the Fed will meet its projection, some are looking for the gap between the yields to keep narrowing, as the two-year yield, which is more sensitive to expectations for changes in interest-rate policy, keeps rising.

The gap, known as the yield curve, has flattened to slightly more than half a percentage point from 1.25 percentage points at the start of the year. The flattening yield curve is seen by some investors as a sign that economic growth may slow, as recessions are frequently foreshadowed by short-term yields rising above those for longer-term bonds.

Others expect the Republican tax overhaul package to lead to more growth and inflation, pushing 10-year yields higher, and perhaps encouraging the Fed to accelerate its expected timetable for raising rates.

"This is going to be the big debate next year," said Edward Al-Hussainy, a fixed-income analyst at Columbia Threadneedle Investments.

The Treasury conducted its final bond auction of the year Thursday with a $28 billion offering of seven-year notes, which analysts said attracted sufficient demand so bond dealers didn't need to disturb quiet markets by selling their purchases after it closed.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

 

(END) Dow Jones Newswires

December 28, 2017 16:36 ET (21:36 GMT)

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