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

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds pulled back Thursday, lifting the yield on the 10-year Treasury note from its lowest level of the year, amid continued fallout from Wednesday's Federal Reserve meeting.

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The yield on the benchmark 10-year note settled at 2.160%, compared with 2.138% Wednesday. Yields rise when bond prices fall.

Trading in the bond market has been volatile over the past two days.

Prices surged early Wednesday after a report showed the consumer-price index fell to 1.9% on an annualized basis in May from 2.2% the previous month. That was the latest sign that inflation is struggling to reach the Fed's 2% target, a development that has been a major factor behind the unexpected strength of the bond market this year.

A slower increase in consumer prices makes bonds more attractive to investors because inflation chips away at the fixed returns of bonds. It also increases skepticism that the Fed will raise interest rates in the second half of the year.

Still, the Fed hasn't backed away from its tightening plans. On Wednesday afternoon, the central bank, as expected, 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.

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The Fed's statement and subsequent press conference from Fed Chairwoman Janet Yellen put an end to the bond rally, leading yields to partially retrace their declines from earlier in the day.

Overall, the Fed was "very nonchalant about inflation and kind of brushed it off," said Blake Gwinn, U.S. interest-rates strategist at NatWest Markets.

Government bonds on both sides of the Atlantic came under further pressure 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 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.

U.S. economic data, however, 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. After months of volatility caused in part by political developments, inflation data has emerged as the overriding focus of investors, said Jim Vogel, interest-rates strategist at FTN Financial.

Should the data pick up, it would support the case for the Fed tightening policy and weaken the argument for buying bonds. But "if inflation is still low in November, the Fed will have to bend," Mr. Vogel said.

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

(END) Dow Jones Newswires

June 15, 2017 15:52 ET (19:52 GMT)