BOND REPORT: Treasury Yields Turn Lower After Soft Inflation Reading

By Mark DeCambre, MarketWatch , Sunny Oh Features Dow Jones Newswires

Core PCE inflation year-over-year slips to 1.4% in July from 1.5%

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U.S. Treasury yields turned lower Thursday after a soft inflation reading, extending a five-month streak of weak core prices data and underlining doubts about the Federal Reserve's ability to raise interest rates one more time this year.

Yields, which move in the opposite direction of debt prices, retreated after data showed core personal-consumption expenditures (PCE) inflation, the Fed's preferred price gauge, rose just 0.1% in July. Although the number met median estimates from economists polled by MarketWatch, the annual rate slipped to 1.4% from 1.5%. This extends the slide of core inflation since February, when it topped the central bank's 2% long-term target for the first time since 2012.

But overall economic data was mixed, showing thicker pocketbooks have propped up consumption, which could heat up price growth. Personal income climbed 0.4%, while consumer spending gained 0.3%.

See: Consumer spending kick into higher gear in July (http://www.marketwatch.com/story/consumer-spending-kicks-into-higher-gear-in-july-2017-08-31)

"The inflation outlook at the moment is somewhat murky," wrote Ward McCarthy, chief financial economist, for Jefferies.

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Market participants say signs of sluggish inflation, remaining below the Fed's target of 2% on an annual basis, has been the main factor limiting a rise in bond yields, which move inversely to prices, despite efforts by the U.S. central bank to normalize monetary policy in the aftermath of the 2007-09 financial crisis.

Because rising inflation can erode the fixed value of a bond, signs of muted inflation can be supportive to buying Treasurys, holding yields lower.

After the reports, the benchmark 10-year Treasury yieldcrept 0.8 basis point lower to 2.137%, close to its lowest reading since Nov. 10, when President Donald Trump's election led to a selloff in government paper. While, the 30-year bond's yield edged lower by a similar amount to 2.742%.

The yield for the 2-year note, which is more sensitive to shifts in the interest-rate outlook, inched 0.5 basis point higher to 1.333%.

ADP on Wednesday reported that private-sector payroll has risen 237,000 in August, a sharp rise from 201,000 in July. The report comes ahead of the closely watched Friday jobs report released by the Labor Department.

The ADP private-sector jobs number has undershot nonfarm-payrolls report by 24,000 in the three of the last four months, according to Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets. But it is still used to get an early direction read of labor-market health. An updated reading of second-quarter gross domestic product on Wednesday, raised to 3%, also helped add to the optimistic tone.

See:MarketWatch Economic Calendar (http://www.marketwatch.com/economy-politics/calendars/economic)

A combination of end of month bond -portfolio rebalancing and seasonally thin volumes has limited a further rise in bond yields so far, market participants said.

Looking ahead, pending home sales in July are set to arrive at 10 a.m. Eastern.

(END) Dow Jones Newswires

August 31, 2017 10:21 ET (14:21 GMT)