Treasurys Pull Back As Investors Favor Riskier Assets

By Sam Goldfarb Features Dow Jones Newswires

U.S. government bonds pulled back Monday as investors favored riskier assets and responded to remarks from Federal Reserve Bank of New York President William Dudley saying he expects another interest-rate increase this year.

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The yield on the benchmark 10-year Treasury note settled at 2.217% compared with 2.191% Friday.

Yields, which rise as bond prices fall, climbed in the overnight session along with global stocks. That is a reversal of their moves from last week, when investors grew anxious about a possible military confrontation between the U.S. and North Korea.

President Donald Trump sent jitters through the financial markets last Tuesday when he said the U.S. would respond with "fire and fury" to further provocations from North Korea. On Sunday, however, the Pentagon's top military officer said the U.S. remained focused on finding a diplomatic solution to the crisis, while other Trump administration officials also said a war isn't imminent.

"The world seems a little safer right now than it maybe did late last week going into the weekend," said Timothy High, senior U.S. interest-rate strategist at BNP Paribas.

After climbing to 2.227% overnight, the 10-year yield declined for much of the U.S. trading session before rising again following Mr. Dudley's comments, which were made in an interview with the Associated Press.

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While acknowledging that inflation could take time to reach the Federal Reserve's 2% annual target, Mr. Dudley took note of rising asset prices and said the Fed would likely need to do more to tighten financial conditions.

Those remarks indicated a possible debate inside the Fed, coming three days after Federal Reserve Bank of Dallas President Robert Kaplan, another voting member of the Fed's rate-setting committee, said he wanted to "see more evidence" of firming inflation before raising interest rates for a third time this year.

While geopolitical concerns have driven some recent buying of government bonds, the market has also been supported by a run of soft inflation data, which has led investors to scale back their interest-rate expectations.

Investors bought bonds Friday after the Labor Department said the consumer price-index increased 0.1% in July from the previous month, below the 0.2% gain anticipated by economists surveyed by The Wall Street Journal.

Soft inflation helps boost Treasurys by preserving the purchasing power of their fixed payments and decreasing the likelihood that the Fed will raise interest rates.

Federal-funds futures, used by investors to place bets on the Fed's rate-policy outlook, on Monday afternoon showed a roughly 47% chance of a rate-increase by December, up from 37% earlier in the day, according to CME Group data.

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

(END) Dow Jones Newswires

August 14, 2017 17:26 ET (21:26 GMT)