By Sam Goldfarb

U.S. government bonds wavered Monday, following their biggest weekly loss of 2016, as investors continued to weigh the possibility of less accommodative central bank policies.

Though up and down throughout the day, the yield on the benchmark 10-year Treasury note ultimately closed higher than Friday despite declines in oil prices and stocks, signaling a shift in investor sentiment beyond just a short-term swing in risk appetite.

Yields rise when bond prices fall.

The Treasury market appeared to take cues from Europe, where bond yields continued to rise following European Central Bank President Mario Draghi's remarks last week that gave a nod to improving financial conditions.

With the ECB and other central banks seemingly reaching the limits of their stimulus efforts, European bonds "have sold off a little bit and Treasurys in sympathy have sold off with it" said Guy Haselmann, head of US interest rate strategy at Bank of Nova Scotia in New York.

Also weighing on Treasurys are two bond auctions this week: a $34 billion sale of five-year U.S. Treasury notes Tuesday and a $28 billion auction of seven-year notes Thursday, analysts said.

The yield on the 10-year Treasury note settled at 1.902%, compared with 1.888% Friday. The yield on the 10-year German bond closed at 0.267%, compared with 0.228% Friday.

The yield on the 10-year Treasury note rose by 0.135 percentage point last week, reflecting optimism over the economy and pessimism over the value of bonds.

In addition to higher oil prices, which investors have taken as a good sign for the global economy, market moves have been influenced by better news out of China, including easing capital outflow from the country thanks to a weaker dollar and new data that suggests it isn't headed toward a sharp slowdown.

Federal Reserve officials aren't expected to raise interest rates at a policy meeting this week. But they could add to the pressure on bonds if they also take note of improving financial conditions, raising expectations for a rate increase at one of their next meetings, some analysts say. The Fed will release its policy statement Wednesday at the conclusion of a two-day meeting.

Fed funds futures, used by investors and traders to place bets on central bank policy, show only a 23% likelihood of an interest-rate increase in June but a 37% likelihood of an increase in July, which is up from 32% a month ago, according to data from CME Group.

Despite recent developments, sluggish global growth outlook and contained inflation continue to draw buyers into Treasury debt, which offers one of the most attractive yields among government bond markets in the developed world. A stronger dollar this year has increased the returns for investors in Asia and Europe who are struggling to obtain high-quality bonds that offer safety and decent income in a low yield world.

 
   COUPON     ISSUE      Price    CHANGE    YIELD    CHANGE 
     7/8%    2-year   100 3/32   dn 1/32   0.834%   +1.2BPS 
     7/8%    3-year   99 19/32   dn 1/32   1.014%   +1.4BPS 
   1 1/4%    5-year   99 14/32   dn 2/32   1.370%   +1.3BPS 
   1 1/2%    7-year   98 26/32   dn 3/32   1.685%   +1.5BPS 
   1 5/8%   10-year   97 17/32   dn 4/32   1.902%   +1.4BPS 
   2 1/2%   30-year   95 14/32  dn 14/32   2.724%   +2.1BPS 
 
   2-10-Yr Yield Spread: +106.8BPS vs + 106.6BPS 
 
   Source: Tradeweb/WSJ Market Data Group

Write to Sam Goldfarb at Sam.Goldfarb@wsj.com

(END) Dow Jones Newswires

April 25, 2016 16:28 ET (20:28 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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