June 28, 2017 / 1:24 PM / a year ago

TREASURIES-Bond prices rebound from lows as market reconsiders Draghi comments

    * Bonds pare price gains on Draghi walk back
    * Yield curve steepens from flattest since 2007
    * Treasury to sell $28 bln seven-year notes

    By Karen Brettell
    NEW YORK, June 28 (Reuters) - U.S. Treasury prices weakened
on Wednesday, but came off their lows on reports that markets
had misinterpreted comments by European Central Bank President
Mario Draghi on Tuesday as being more hawkish than he had
    Bonds weakened and the euro gained on Tuesday after Draghi
indicated that the ECB might tweak its stimulus so that it does
not become more accommodative as the economy recovers.
    Reports on Wednesday, however, said that Draghi intended to
signal tolerance for a period of weaker inflation, not an
imminent policy tightening, according to sources familiar with
his thinking.                         
    “The big trigger of action this morning has been the walk
back of Draghi’s more hawkish comments yesterday,” said Guy Le
Bas, chief fixed income strategist at Janney Montgomery Scott
LLC in Philadelphia.
    Benchmark 10-year notes             were last down 4/32 in
price to yield 2.212 percent, up from 2.20 percent late on
Wednesday. The yields rose as high as 2.256 before the ECB
    The yield curve between five-year notes and 30-year bonds
               steepened after falling to 91.9 basis points
overnight, the lowest since late 2007.
    The yield curve has flattened in the past month as Federal
Reserve officials indicated that further monetary policy
tightening was likely even as inflation falls below targets.
    That has caused short- and intermediate-dated debt, which is
more sensitive to interest rate changes, to underperform while
concerns about tepid growth and falling inflation have supported
long bonds.
    Fed Chair Janet Yellen on Tuesday reiterated her view that
the U.S. central bank would continue to raise rates only
    The Treasury Department on Wednesday will sell $28 billion
in seven-year notes, the final sale in $88 billion of new
coupon-bearing supply this week.
    A $34 billion sale of five-year notes saw the weakest demand
in four months on Tuesday. The ratio of bids to the amount of
five-year notes offered              came in at 2.33, the lowest
since February.             
    That came after the government sold $26 billion in two-year
notes to strong demand on Monday.             

 (Editing by Meredith Mazzilli)
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