U.S. government bond prices rallied broadly Wednesday, sending the yield on the benchmark 10-year Treasury note to a fresh 2017 low, as the latest signs of slowing inflation raise doubt over the Federal Reserve's plans for raising interest rates later this year.
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The buying sent the yield on the benchmark 10-year Treasury note to as low as 2.122% Wednesday morning, below the 2.147% ending level on June 6, which was the lowest close since Nov. 10.
The yield was recently at 2.132%, according to Tradeweb, compared with 2.206% Tuesday. Yields fall as bond prices rise.
The key boost for the bond market was a report showing the consumer-price index last month was up 1.9% on an annualized base, dipping below the Fed's 2% target again. Excluding food and energy, CPI rose 1.7% over the past 12 months through May, the smallest gain since May 2015.
Analysts say the data, along with a weak retail sales report, may not stop the Fed from raising short-term interest rates Wednesday afternoon, when the central bank concludes its two-day meeting. But they bolster some investors' belief that the Fed may be forced to stand pat during the second half of the year unless the deceleration in inflation proves to be transitory.
This view has played a big part in driving down long-term Treasury bond yields over the past few weeks and boosting demand for the Treasury's bond auctions earlier this week.
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"The weak data certainly adds to the drumbeat of one hike and done for the year," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.
The Fed is scheduled to release its interest-rate statement Wednesday afternoon, followed by a press conference from Fed Chairwoman Janet Yellen.
Inflation expectations tumbled as reflecting in the shrinkage of the 10-year break-even rate, or the yield premium investors demanded to hold the 10-year Treasury note relative to the 10-year Treasury inflation-protected security.
The 10-year break-even rate fell by more than 0.05 percentage point Wednesday to 1.73 percentage point, the lowest since early November. At this level, it suggests investors expect the U.S. inflation rate to run at an annualized 1.73% within the next 10 years, way below the Fed's 2% target.
The risk for the Fed, say analysts, is that if inflation expectations become unanchored and fall further from here, it would make it harder for policy makers fulfill their inflation mandate. Therefore, the central bank may need to slow down the pace of tightening.
A shrinking break-even rate also means some investors sold TIPS and migrated cash into Treasury debt, which contributed to the slides in Treasury yields.
"It makes tightening later this year much more difficult," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. "We think this effectively takes September off the table."
Write to Min Zeng at email@example.com
(END) Dow Jones Newswires
June 14, 2017 09:59 ET (13:59 GMT)