BOND REPORT: Treasury Yields Extend Reversal From Six-week High On Weak Inflation

By Sunny Oh Features Dow Jones Newswires

The core consumer-price index rose 0.1%

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Treasury prices rallied, pushing yields firmly lower on Friday, after weak inflation data and lukewarm consumer spending lowered expectations for two more Fed rate hikes this year.

The 10-year Treasury note lost 6.1 basis points to 2.329%, retreating from its six-week high of 2.414% hit on May 10. Bond prices move in the opposite direction of yields; one basis point is equal to one hundredth of a percentage point.

The yield for the policy-sensitive 2-year Treasury lost 6.2 basis points to 1.295%, while the yield for the 30-year bond, or the long bond, gave up 3.3 basis points to 2.990%%.

Despite a spate of economic data showing a steady economic outlook, yields for U.S. government paper slumped. Investors were concerned over April's weak inflation reading, lowering expectations of higher rates. The consumer-price index, or CPI, notched 2.2% growth year on year, up 0.2% for April, higher than the Federal Reserve's 2% inflation target.

But strategists pointed out last month's increase was driven by higher energy prices , something which the Federal Reserve tends to discount when gauging if inflation is set to exceed its 2% target, warranting further monetary tightening. Core CPI, which excludes food and energy prices, grew 0.1% for April, missing the 0.2% target forecast by a survey of economists polled by MarketWatch. But it was up 1.9% on a year on year basis.

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"The CPI number was pretty bad today. If you look at through the details the core CPI was much less expected. The weakness was there, it was fairly prevalent in everything from cars to medical care," said Aaron Kohli, an interest rate strategist for BMO Capital Markets.

The Chicago Mercantile Exchange's FedWatch tool (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html) showed traders had priced in lower expectations of a June rate hike to 73.8% from 83.1% the day before.

Retail sales gained 0.4%, but were below economists' expectation of 0.5%. The tepid growth added evidence of the retail sector's ailing health amid bankruptcies and a clutch of woeful earnings in the sector over the past few days. Anemic spending and weak economic growth could dampen inflation expectations, which can be bullish for bond prices, nudging yields lower.

See: Retail sales strengthen in April, brightening economic outlook (http://www.marketwatch.com/story/retail-sales-strengthen-in-april-brightening-economic-outlook-2017-05-12)

(http://www.marketwatch.com/story/us-consumer-prices-rebound-in-april-2017-05-12)Traders paid close attention to Fed speakers on Friday as they searched for clarity on the central bank's schedule for reducing its $4.5 trillion balance sheet. If the Fed, a large buyer of Treasurys, leaves the market, yields are likely to head higher.

Philadelphia Fed President Patrick Harker, a voting member of the policy-setting Federal Open Market Committee, said he supported two more rate hikes (http://www.marketwatch.com/story/feds-harker-backs-two-more-rate-hikes-this-year-saying-things-are-looking-good-2017-05-12)amid an improving economic outlook in a speech to the Urban Economic Policy Conference at Drexel University. On the other hand, Chicago Fed President Charles Evans, also a voting member, said downside risks to inflation could change the Fed's plans to tighten monetary conditions this year.

(END) Dow Jones Newswires

May 12, 2017 13:20 ET (17:20 GMT)