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By Joseph Adinolfi, MarketWatch , Rachel Koning Beals

2-year bund yield pulls off of record low but likely not for long

Treasury yields declined on Thursday after Treasury Secretary Steven Mnuchin said the longstanding strong-dollar policy was beneficial in the long term, and that his department was looking into the possibility of issuing more long-term debt.

"The perception is, not that he said this explicitly, but the perception is that he was not particularly aggressive in talking about the strong dollar," said Guy LeBas, chief fixed-income strategist at Janney.

Shifts in the dollar's valuation have tended to impact interest rates, which have historically been closely correlated with the greenback.

Mnuchin, whose interview aired on CNBC Thursday morning, also said the administration of President Donald Trump remains committed to "very significant" tax reform, and that it would likely be implemented by the Congress's August recess. The Wall Street Journal also published an interview with Mnuchin late Tuesday.

Yields edged lower on Wednesday after the Federal Reserve, in minutes from its latest policy meeting, (http://www.marketwatch.com/story/fed-minutes-show-support-for-rate-hike-fairly-soon-2017-02-22) expressed confidence that the next interest-rate hike would come "fairly soon" provided the economy stays on course or strengthens, they said Trump's fiscal policies remained a wild card.

"The minutes of the February FOMC meeting showed the committee was in no rush to raise rates," said Marshall Gittler, head of investment research with FXPrimus.

Read:Why stock, bond investors shouldn't 'just buy everything' (http://www.marketwatch.com/story/why-investors-shouldnt-just-buy-everything-2017-02-22)

Early Thursday, the yield on the benchmark 10-year Treasury note fell 2.5 basis points to 2.388%, while the yield on the two-year Treasury note shed 2.7 basis points to 1.192%. The yield on the 30-year bond fell 1.1 basis point to 3.024%.

Read:This is when investors should start worrying about rising bond yields (http://www.marketwatch.com/story/this-is-when-investors-should-start-worrying-about-rising-bond-yields-2017-02-23)

Comments Wednesday from Fed Gov. Jerome Powell, who said the risks facing the economy are now more balanced, (http://www.marketwatch.com/story/feds-powell-says-risks-facing-economy-are-now-more-in-balance-2017-02-22) had initially caused yields to rise on Wednesday. He also said it would be appropriate to tighten policy further--provided the economy continues to improve as expected.

Last week, Fed chairwoman Janet Yellen told Congress that waiting too long to raise interest rates would be "unwise" during testimony that was widely characterized as hawkish. She also said it is possible the central bank could raise rates during its coming meetings.

Before her remarks, investor had all but scratched out the possibility of a March hike. And still, the Fed funds futures market is pricing in less than 20% chance of a rate hike in March--far below the 70% threshold typically seen as the minimum necessary to support a hike.

Typically, when investors expect rates to rise, they push yields higher to align with the expected increase in the base rate. Also, the dollar tends to appreciate as higher rates increase the returns on dollar-denominated assets.

Read:Sovereign-bond yield spreads signal nervousness (http://www.marketwatch.com/story/sovereign-bond-yield-spreads-signal-nervousness-2017-02-21)

In European trade, the yield on the German two-year note , which traded at an all-time low at minus 0.920% Wednesday, improved slightly to minus 0.880%. Market strategists widely attributed the move earlier this week to a poll showing an increase in support for far-right French presidential candidate Marine Le Pen (http://www.marketwatch.com/story/anti-le-pen-alliance-may-give-frances-macron-a-boost-2017-02-22). Le Pen has promised a referendum on France's European Union membership within six months of taking office.

Analysts think the climb in yield could prove short-lived. With political uncertainty abounding, "risk aversion has fueled further gains in German 2-year bund prices [this week], which are continuing to push ever higher into nose bleed territory," said Michael Hewson, chief market analyst at CMC Markets UK. Prices and yield move inversely.

(END) Dow Jones Newswires

February 23, 2017 10:45 ET (15:45 GMT)

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