By Min Zeng

U.S. government bonds strengthened on Monday as weaker stock and oil prices stoked demand for safe-haven assets.

However, the bond market's strength was contained ahead of the Federal Reserve's first policy meeting in 2017 and a key labor-market release.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.471%, according to Tradeweb, compared with 2.480% Friday. Yields fall as bond prices rise.

The Fed is scheduled to start its two-day policy meeting Tuesday and release a policy statement Wednesday. The central bank is widely expected to stand pat after raising short-term interest rates in December forthe second time since 2006.

Investors will zero in on the Fed's assessment over the growth and inflation outlook in the policy statement, which will influence market expectation regarding the timing for the next rate increase.

Interest rate futures suggest that many investors expect the Fed to wait until the summer to raise interest rates. Analysts say the Fed could act before that if economic releases show the economy is picking up speed and inflation pressure continues to increase.

The fiscal outlook is likely to shape the timing and pace of the Fed's tightening. U.S. government bond yields have risen since the U.S. Election Day as the prospect of expansive fiscal policies from President Donald Trump has fueled expectations over stronger growth, higher inflation and potentially a quickened pace of rate increases by the Fed than many investors anticipate.

Inflation chips away bonds' fixed returns over time and is the big threat to long-term government bonds.

This week's data will also help shape the Fed's policy outlook. The key release -- the nonfarm payrolls -- is due on Friday. The labor market has been approaching its full employment, which has been among factors driving the Fed to tighten monetary policy after years of ultraloose stance.

Mr. Trump's policy mix has been generating price swings in the bond market. Investors are concerned that Mr. Trump's protectionist stance could generate trade frictions and undercut the growth momentum in both the U.S. and its trading partners. Adding to the mix is his executive order last week to curb immigration.

The 10-year yield reached a two-year high of 2.6% in mid-December from 1.867% on Nov. 8, Election Day. It fell to near 2.3% earlier this month.

The yield swings reflects "uncertainty regarding Trump's priorities" and how those may differ from the market's assumptions," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

Barbara Reinhard, head of asset allocation at Voya Investment Management, said another risk for the U.S. growth is that "the Fed could engineer a recession by raising rates aggressively," such as four to five times a year.

For now, Ms. Reinhard remains sanguine on the growth outlook, which supports her stance to favor stocks over Treasury debt.

Corporate bond sales could weigh on Treasury prices, analysts said. Sales of new corporate debt has been robust this month as firms lock in still historically low interest rates.

Underwriters and firms typically sell Treasury debt to hedge unwanted volatility in interest rates, reflecting the Treasury market's important role as a bedrock for global finance.

Microsoft Corp. is in the market with a jumbo debt sale Monday, with the technology giant planning to issue benchmark-sized three-year, five-year, seven-year, 10-year, 20-year, 30-year and 40-year bonds, according to a deal notice released by underwriting banks.

Traders say it put some selling pressure in the Treasury market and the impact concentrated on the 30-year Treasury debt. Its yield recently rose to 3.075% from 3.059% Friday.

Month-end demand could provide some support for the bond market near term, traders said.

On the last trading session of each month, newly minted bonds replace maturing debt in some bond indexes. Fund managers who track these indexes replicate the adjustment, creating demand for bonds.

Write to Min Zeng at

(END) Dow Jones Newswires

January 30, 2017 11:22 ET (16:22 GMT)

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