Treasury yields edged off five-month lows on Wednesday as the Federal Reserve's Beige Book report painted a mixed economic outlook, but nonetheless showed a tight labor market that could stoke further inflation.
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Treasury yields for the 10-year note jumped 2.5 basis points to 2.202%, after trading around 2.16% late Tuesday in New York. Yields for the two-year notes rose 0.4 basis points to 1.173%, while yields for the 30-year Treasury bond picked up 2.2 basis points to 2.861%.
Bond prices move in the opposite direction as yields; one basis point is one hundredth of a percentage point.
The Federal Reserve's Beige Book, a compilation of anecdotes on local economic conditions, showed employers had trouble filling open positions. The report revealed that even as wages have grown, inflation has not risen in tandem. But low unemployment would eventually bring about inflation, analysts said.
"Labor market tightening really ramped up," wrote Tom Porcelli, chief U.S. economist for RBC Capital Markets, in a note. He warned that investors shouldn't "be surprised if wages pressures began to intensify through the balance of 2017."
See: Fed beige book sees wage gains but only modest inflation (http://www.marketwatch.com/story/fed-beige-book-sees-wage-gains-but-only-modest-inflation-2017-04-19)
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Traders and analysts pay attention to the report because it could inform the Fed's thinking on whether or not to continue with its schedule of two or more rate increases this year, as hard data deteriorates and traders price in lower expectations of a rate hike in June.
The release of the Beige Book comes at a time when weak data, including the first fall in consumer-price inflation in seven years, has driven investors to stay bullish on U.S. government paper. Yields have plummeted over the past two weeks as a dimming economic outlook has pared down inflation expectations.
The unbroken streak of yield declines had left some balking at the price tag of Treasurys. Instead, market strategists said some portfolio managers were cashing out of their bond holdings as prices have risen on recent haven-buying.
"We've had a pretty fierce rally, it's been virtually relentless. We honestly were expecting a consolidation pattern. Now we're just seeing the delayed reaction to the speed of the move," said Aaron Kohli, an interest-rate strategist at BMO Capital Markets. "You're seeing the yields stabilize," he said.
Geopolitical concerns continued to cast a pall over markets after British Prime Minister Theresa May declared a snap election to strengthen her hand at the negotiating table as the U.K. withdraws from the EU. Elsewhere, French bonds gained after polls showed mainstream candidate Emmanuel Macron holding onto his lead over Marine Le Pen, the far-right candidate who has promised a referendum on whether France should leave the EU, Reuters reported (http://www.reuters.com/article/eurozone-bonds-idUSL8N1HQ1Y8).
Ten-year yields for French government notes fell 0.7 basis points to 0.892%.
Boston Fed President Eric Rosengren, a nonvoting member of the central bank's monetary policy-setting committee, advised the Federal Reserve on Wednesday to reduce its balance sheet soon (http://www.marketwatch.com/story/feds-rosengren-wants-to-shrink-balance-sheet-so-slowly-that-rate-hikes-can-continue-2017-04-19) but to let it unwind gradually so the central bank could hike rates at the same time. Also speaking Wednesday, Fed Vice Chairman Stanley Fischer said global economic growth was beginning to pick up, mitigating any "global spillovers" that might occur from the Fed raising the government's benchmark short-term interest rate.
(END) Dow Jones Newswires
April 19, 2017 17:49 ET (21:49 GMT)