U.S. Bond Prices Slip as Fed Rate Increase Seen More Likely in December

By Daniel Kruger Features Dow Jones Newswires

U.S. government bond prices extended a nine-day streak of declines the day after the Federal Reserve signaled that it could raise rates again in December.

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The yield on the benchmark 10-year Treasury note rose to 2.278% from 2.276% Wednesday. Yields rise as bond prices fall.

Meanwhile, the price on the two-year Treasury note, which is more sensitive to market expectations for Fed policy, was steady, with its yield at 1.442%, the highest closing level since November 2008.

The Fed announced Wednesday that it will begin to shrink its $4.5 trillion bond portfolio in October an effort to bring it into alignment with levels before the financial crisis. The central bank will be pulling $10 billion a month from the financial system, and increasing that amount gradually. Many analysts expect the reductions to reach $1 trillion by early 2020.

Should the Fed decide to raise interest rates again this year, it will have met its own forecast of three increases, which they had released at their meeting last December. Policy makers released projections that showed they expect to increase rates again later this year, followed by three more times in 2018.

Prices for stocks and bonds have surged this year, even as the Fed has made it clear it wants to dial back on the stimulative policies that have been in place during the period since the financial crisis.

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"Financial conditions have eased quite a lot," said Christopher Sullivan, a bond fund manager for the United Nations Federal Credit Union. "There's a likelihood just based on that" of an additional rate increase.

U.S. markets have benefited from the stimulative policies of other central banks, particularly the European Central Bank and the Bank of Japan, which are still pumping money into the financial systems by purchasing government bonds.

Goldman Sachs Group assessed the odds of a December rate increase at 75%, up from 60% before Wednesday's Fed meeting, citing Chairwoman Janet Yellen's skepticism that weakness in inflation over the last several months will endure. Those odds roughly match the futures market, which is pricing in 78% odds of higher rates, according to CME Group.

Write to Daniel Kruger at daniel.kruger@wsj.com

U.S. government bond prices extended a nine-day streak of declines the day after the Federal Reserve signaled that it could raise rates again in December.

The yield on the benchmark 10-year Treasury note rose to 2.278% from 2.276% Wednesday. Yields rise as bond prices fall.

Meanwhile, the price on the two-year Treasury note, which is more sensitive to market expectations for Fed policy, was steady, with its yield at 1.442%, the highest closing level since November 2008.

The Fed announced Wednesday that it will begin to shrink its $4.5 trillion balance sheet in October an effort to bring it into alignment with levels before the financial crisis. The central bank will be pulling $10 billion a month from the financial system, and increasing that amount gradually. Many analysts expect the reductions to reach $1 trillion by early 2020.

Should the Fed decide to raise interest rates again this year, it will have met its own forecast of three increases, which they had released at their meeting last December. Policy makers released projections that showed they expect to increase rates again later this year, followed by three more times in 2018.

Prices for stocks and bonds have surged this year, even as the Fed has made it clear it wants to dial back on the stimulative policies that have been in place during the period since the financial crisis.

"Financial conditions have eased quite a lot," said Christopher Sullivan, a bond fund manager for the United Nations Federal Credit Union. "There's a likelihood just based on that" of an additional rate increase.

U.S. markets have benefited from the stimulative policies of other central banks, particularly the European Central Bank and the Bank of Japan, which are still pumping money into the financial systems by purchasing government bonds.

Goldman Sachs Group assessed the odds of a December rate increase at 75%, up from 60% before Wednesday's Fed meeting, citing Chairwoman Janet Yellen's skepticism that weakness in inflation over the last several months will endure. Those odds roughly match the futures market, which is pricing in 78% odds of higher rates, according to CME Group.

Write to Daniel Kruger at daniel.kruger@wsj.com

Corrections & Amplifications

This article was corrected Sept. 22, 2017 at 12:57 p.m. ET because an earlier version incorrectly referred to the Fed's balance sheet as the Fed's bond portfolio in the fourth paragraph.

The Fed announced Wednesday that it will begin to shrink its $4.5 trillion balance sheet in October. "U.S. Bond Prices Slip as Fed Rate Increase Seen More Likely in December," at 11:20 a.m. ET and 4:09 p.m. ET on Thursday, incorrectly referred to the figure as the Fed's bond portfolio in the fourth paragraph. (Sept. 22, 2017)

(END) Dow Jones Newswires

September 22, 2017 13:09 ET (17:09 GMT)