Treasury yields dip slightly

US Treasury yields fell slightly on Thursday on doubts whether the Federal Reserve would raise interest rates more than once by the end of 2017 as it signaled it is preparing to shrink its $4.5 trillion balance sheet later this year. Bond yields slipped into the lower end of this week's tight trading range with the 10-year yield hovering around the 2.25 percent area.
"We have a lot of commotion but not a lot of action. It's a very pedestrian trading day," said Aaron Kohli, interest rates strategist at BMO Capital Markets in New York. Analysts said volume was below average ahead of Friday's shortened trading session. The US bond market will close early at 2 p.m. (1800 GMT) on Friday and will be shut on Monday for the US Memorial Day holiday.
The benchmark 10-year Treasury yield was 2.254 percent, down 1 basis point from late on Wednesday. It has bounced in a narrow 7 basis point range so far this week. Thursday's yield decline was spurred by bond buying in the wake of the Federal Reserve's release of the minutes on its May 2-3 policy meeting on Wednesday. The minutes supported the view that it has adopted a gradual approach toward paring its reinvestments in Treasuries and mortgage-backed securities as it expects to further raise short-term interest rates.
The Fed's cautious stance stemmed partly from inflation data in March and April that fell short of what traders had expected, raising worries whether price growth would reach the Fed's 2 percent goal. "The minutes were indicative of a June hike," said Thomas Roth, head of Treasury trading at MUFG Securities America in New York. "It sounds like they want to get this (balance sheet) tapering started but would that mean one less rate hike for this year."
Fed policymakers' current forecasts on key short-term rates signalled they expect two more rate increases by year-end. The futures market implied traders priced in an 83 percent chance of a quarter point rate increase at the Fed's June 13-14 meeting, while they saw slightly less than a 50 percent shot of another hike by the end of 2017, CME Group's FedWatch tool showed.
Meanwhile, the US Treasury Department completed this week's $88 billion in coupon-bearing government supply with the $28 billion sale of new seven-year note, which fetched decent demand. Corporate bond issuance lightened up from its frantic pace earlier this week, reducing their upward pressure on Treasury yields.