U.S. Bonds End Higher as Another Inflation Gauge Weakens

By Gunjan Banerji Features Dow Jones Newswires

U.S. government bonds rose Thursday after a lackluster report on domestic business prices showed muted inflation while heightened geopolitical tensions with North Korea persisted.

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The yield on the 10-year Treasury settled at 2.211%, its lowest level since June 27, compared with 2.246% on Wednesday. Yields fall as bond prices rise.

The producer-price index for final demand, which measures changes in prices that U.S. companies receive for goods and services, declined a seasonally adjusted 0.1% in July from the prior month, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal had expected the gauge to rise 0.2%.

The decline marked the latest sign of weakening inflation pressure, and a potential challenge to policy makers contemplating when to next raise interest rates.

"That number was a big surprise. The market was not ready for that," said Jeff MacDonald, head of fixed-income strategies at Fiduciary Trust Company International in New York. "The market is starting to get a little frustrated and discount how much inflation and growth we're going to get."

Investors consider inflation a major threat to government bonds because it erodes the purchasing power of their fixed payments.

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Federal-funds futures, used by investors to place bets on the Federal Reserve's rate-policy outlook, on Thursday showed roughly 44% odds of another rate-increase this year, down from 59% a month ago, according to CME Group data.

Strong demand for an auction of 30-year bonds further boosted Treasurys, as investors regained their appetite for new debt following an underwhelming 10-year note sale on Wednesday.

Heightened strains between North Korea and the U.S. also pushed investors into assets perceived as safe, such as government bonds on Thursday as major stock indexes declined. In another sign of investor jitters, one measure of stock market volatility, the CBOE Volatility Index, spiked and was on track to close at its highest level in over a month.

Treasury yields also dipped after Federal Reserve Bank of New York President William Dudley spoke on Thursday, highlighting moderate expansion in the labor market but also addressing challenges such as lackluster wage growth. Minneapolis Fed President Neel Kashkari is scheduled to speak Friday after the release of a monthly gauge of consumer prices.

Sam Goldfarb contributed to this article.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

August 10, 2017 16:13 ET (20:13 GMT)