U.S. Treasurys Pull Back as Investors React to Fed Signals

By Sam Goldfarb Features Dow Jones Newswires

Prices of U.S. government bonds fell Thursday amid continued fallout from Wednesday's Federal Reserve meeting, which suggested the central bank is sticking with its plan gradually tighten monetary policy despite a run of soft inflation data.

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In recent trading, the yield on the benchmark 10-year note was 2.159%, according to Tradeweb, compared with 2.138% Wednesday, the lowest close since Nov. 10. Yields rise when bond prices fall.

Trading in the bond market has been volatile over the past two days. Prices surged early Wednesday following a report showing the consumer-price index fell last month to 1.9% on an annualized basis from 2.2% the previous month. But they retraced some of their gains after the Fed meeting, which indicated that officials are still fairly comfortable with the state of the economy.

As expected, the Fed announced it would raise short-term interest rates for the second time in 2017. Officials said they were "monitoring inflation developments closely" but signaled they still expect to raise rates one more time this year while also starting to slowly unwind the Fed's balance sheet that includes more than $2 trillion in Treasury debt.

Selling of Treasurys gained some further momentum Thursday morning after three Bank of England officials dissented on the central bank's decision to keep its benchmark interest rate steady, arguing instead for an immediate rate-increase.

The unexpected number of dissenting votes was taken as a sign by investors that the U.K. central bank is closer to ending the stimulus put in place after last year's Brexit referendum.

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U.S. economic data, though, was supportive of bond prices. A report showed industrial production was flat in May, below the 0.1% increase anticipated by economists surveyed by The Wall Street Journal.

Despite recent swings, many investors and analysts expect the market to be relatively calm in the near future. The yield on the 10-year Treasury note has fallen from 2.446% at the end of 2016, defying predictions that it would keep rising as Congress pursued expansionary fiscal policies and the Fed raised rates.

At this point, investors are roughly divided between those who believe the recent rally has more legs and those who think it has reached its peak. But few expect any big change given a lack of easily identifiable catalysts, said Blake Gwynn, U.S. interest rates strategist at Natwest Markets.

There is a "pretty wide consensus that we're stuck in the mud here for a couple of months," he said.

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

(END) Dow Jones Newswires

June 15, 2017 11:06 ET (15:06 GMT)