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U.S. Government Bonds Strengthen on Last Trading Day of 2017

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12/29/2017 | 11:21pm CET
By Gunjan Banerji 

U.S. government bonds strengthened on the last trading day of 2017, capping off the calmest year for the benchmark 10-year U.S. Treasury note in almost four decades.

The yield on the 10-year note fell to 2.409%, according to Tradeweb, from 2.432% on Thursday, settling below where it ended last year at 2.446%. Bond prices rise as yields fall.

Friday's moves likely included investors such as pension funds or other asset managers adjusting positions before the start of 2018 in thin trading, analysts said.

The 10-year Treasury yield darted higher earlier in December as U.S. lawmakers passed a tax overhaul and the Federal Reserve raised rates for the third time this year. Tax cuts could also spur growth and inflation, which is a threat to the value of longer term government bonds because it erodes the purchasing power of their fixed payments. The tax overhaul could also increase the deficit, leading to more government borrowing and a greater supply of bonds.

The 10-year yield then retreated in recent sessions as the end of the year approached. The yield has spent much of the year trading within a narrow range as investors assessed the path of interest rates and the prospects for inflation.

The 10-year yield has climbed for two consecutive quarters but snapped a two-year streak of gains, while recording the smallest daily percentage change since 1978 this year, according to the WSJ Market Data Group.

The yield on the two-year Treasury note, which tends to be more sensitive to the path of rate increases, recorded its largest yearly climb in over a decade.

With inflation pressures relatively muted, some analysts see little reason for the 10-year yield to break out of the relatively narrow range in which it has traded recently.

"The 10-year is going to trend back to 2.4%," said Jim Vogel, an interest rates strategist at FTN Financial. "That's where people feel comfortable."

Write to Gunjan Banerji at [email protected]

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