BOND REPORT: U.S. 10-year Treasury Yield Drops To Lowest Since November Ahead Of Fed Policy Update

By Sunny Oh Features Dow Jones Newswires

Core consumer price inflation lowest in 2 years

Continue Reading Below

Treasury yields tumbled--and prices surged--to their lowest level since November after weak inflation numbers diminished expectations for the Federal Reserve to lift interest rates at a rapid pace for the rest of the year, ahead of a key rate decision Wednesday afternoon.

The yield for the benchmark 10-year note slumped 7.9 basis points to 2.133%. Bond prices move inversely to yields; one basis point is one hundredth of a percentage point.

The yield for the 2-year note , the Treasury note most sensitive to changes in Fed policy, fell 7.3 basis points to 1.295%, while the 30-year bond, or the long bond, fell 6.8 basis points to 2.798%.

Traders are betting that the central bank may need to adopt a more gradual pace of monetary tightening. Consumer-price inflation, or cost of living, slowed to 1.9% in May from 2.2% in April (http://www.marketwatch.com/story/inflation-falls-again-in-may-as-cpi-recedes-from-recent-high-water-mark-2017-06-14), while the core index, which strips out volatile energy and food prices, rose 0.1% in May. Compared with a year ago, core CPI was up 1.7%, the lowest in 2 years. Retail sales fell 0.3% in May (http://www.marketwatch.com/story/us-retail-sales-in-may-are-weakest-in-16-months-2017-06-14), the weakest in 16 months.

Lower inflation is bullish for bonds, because a rise in inflation can erode the value of bond's fixed interest payments.

Continue Reading Below

"We don't think that it derails the Fed this afternoon (although perhaps it should), but it makes tightening later this year much more difficult," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a note. He downgraded the likelihood of a rate increase after September's policy meeting, the next earliest opportunity for a rate hike after June.

See: Even after weak data, Fed still seen hiking rates--but not in September (http://www.marketwatch.com/story/even-after-weak-data-fed-still-seen-hiking-rates-but-not-in-september-2017-06-14)

The Fed's updated policy statement is set to be released at 2 p.m. Eastern in the afternoon. With a Fed rate hike for Wednesday a near-certainty, investors said they would pay close attention to how the central bank is interpreting a batch of weaker-than-expected economic data. Yellen will hold a news conference a half-hour after the policy releases, which include a fresh take on Fed members' projections for future rate increases, known as the dot plot.

Market strategists said investors should look for a view on the debt ceiling and how the central bank intends to juggle their plans for balance sheet reduction with its hikes to the Fed-funds rate. Senior Fed officials have said the central bank will only cut its $4.5 billion portfolio of securities only if its normalization of interest rates is fully under way. Balance sheet reductions also can have a tightening effect.

Despite the central bank's insistence that the recent dip in inflation readings have been "transitory, (http://www.marketwatch.com/story/fed-holds-interest-rates-steady-dismisses-first-quarter-slump-as-transitory-2017-05-03)" the bond market has shown more pessimism than the central bank. The spread between the 2-year note and the 10-year note, known as a the yield curve which shows bond investor's expectations for growth and inflation, fell to 83 basis points most recently from 133 basis points in Dec., is at the narrowest since last October, implying lowered expectations that inflation will hover around the Fed's target 2% level.

Read: Here's what the market thinks the Fed has got wrong (http://www.marketwatch.com/story/heres-what-the-market-thinks-the-fed-has-got-wrong-2017-06-13)

(END) Dow Jones Newswires

June 14, 2017 10:29 ET (14:29 GMT)