Treasurys Pull Back as Inflation Picks Up

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds pulled back Friday as new data showed an uptick in inflation and compensation for workers in the first quarter despite lackluster economic growth.

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Gross domestic product rose 0.7% from January through March, the Commerce Department said Friday, marking the economy's weakest quarter since early 2014. Nevertheless, a broad gauge of U.S. wages and benefits rose 0.8%, its fastest pace since 2007. The price index for personal-consumption expenditures, the Fed's preferred inflation gauge, also climbed 2.4%, the biggest jump since spring 2011.

Bond investors pay attention to both wage and inflation data because higher wages and benefits can feed into broader inflation, which is a main threat to bonds, eroding their fixed returns over time.

A round of solid economic data out of Europe had already weighed on Treasurys heading into the GDP report, lifting the yield on the benchmark 10-year note above 2.3% after it had slipped below that threshold Thursday.

In recent trading, the yield was 2.313%, according to Tradeweb, compared with 2.298% Thursday. Yields rise when bond prices fall.

Friday's data was notable, in part, because it came two weeks the Labor Department reported that the consumer-price index had declined 0.3% in March, a surprising turn that helped contribute to a recent rally in government bonds.

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The latest report "puts us back on that trend where we should gradual increases in inflation over the next several years," said Mark Cabana, U.S. rates strategist at Bank of America Merrill Lynch in New York.

Any increase in Treasury yields Friday could be difficult to sustain due to technical factors. At the end of each month, newly minted bonds replace maturing debt in some benchmark bond indexes. Fund managers who track these indexes replicate the moves by buying Treasury debt, pushing yields lower.

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

U.S. government bonds retraced early losses on Friday, ending the day higher as month-end demand helped offset signs of firming inflation pressures.

After climbing to 2.331% in the morning, the yield on the benchmark 10-year Treasury note settled at 2.282%, compared with 2.298% Thursday. Yields fall when bond prices rise.

Early selling hit the Treasurys market following the Commerce Department's quarterly report on the economy, which showed lackluster growth but a solid increase in wages and benefits for workers and the biggest increase in the Federal Reserve's preferred inflation gauge since spring 2011.

Bond investors pay attention to both wage and inflation data because higher wages and benefits can feed into broader inflation, which is a main threat to bonds, eroding their fixed returns over time.

Friday's data was notable, in part, because it came two weeks after the Labor Department reported that the consumer-price index had declined 0.3% in March, a surprising turn that contributed to a recent rally in government bonds.

A round of solid economic data out of Europe had already weighed on Treasurys heading into the gross domestic product report, lifting the yield on the benchmark 10-year note above 2.3% after it had slipped below that threshold on Thursday.

The latest report "puts us back on that trend where we should get gradual increases in inflation over the next several years," said Mark Cabana, U.S. rates strategist at Bank of America Merrill Lynch in New York.

Still, the initial rise in yields proved difficult to sustain. At the end of each month, newly minted bonds replace maturing debt in some benchmark bond indexes. Fund managers who track these indexes replicate the moves by buying Treasury debt, pushing yields lower.

Traders and analysts also attributed some of the bond market's strength in the afternoon to caution ahead of what is a long-weekend for much of Europe and Asia. U.S. Treasurys are viewed as haven assets, making them a logical place to park cash for investors worried about unexpected events that would threaten the economy.

Broad sentiment in the market has also been beneficial for bond prices. Over the past month, U.S. economic data has been fairly weak, sewing doubts about whether the Federal Reserve will stick to its plan of raising interest rates two more times this year after its last interest-rate increase in March.

Some more clarity could come next week, as Fed officials meet for their May policy meeting and the Labor Department releases its monthly jobs numbers. The central bank isn't expected to raise rates. Still, investors will be watching for clues about its future plans in its policy statement and at separate events where Fed officials will make public remarks.

Higher interest rates set by the Fed generally have a knock-on effect on the bond market, causing yields to rise on short-term government debt in particular.

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

(END) Dow Jones Newswires

April 28, 2017 16:09 ET (20:09 GMT)