BOND REPORT: Treasury Yields Rise For The Week As Fed Displays Hawkish Feathers

By Sunny Oh Features Dow Jones Newswires

Pyongyang says it could test a hydrogen bomb in the Pacific Ocean

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Treasury yields rose for the week after the Federal Reserve pressed forward with its December rate hike despite investors' concerns that softening inflation may prove more than temporary.

There was some unwinding of the yield move higher on Friday trade after North Korea threatened to test a hydrogen bomb in the Pacific Ocean, escalating tensions between the U.S. and the isolated nation and modestly stoking demand for Treasurys and other assets seen as safe.

The benchmark 10-year Treasury yield fell 1.6 basis points for the day, but rose 6 basis points for the week.

The 30-year bond yield was down 1.2 basis points on Friday, paring the week-long gains to 2.5 basis points.

The shorter 2-year note was mostly unchanged, keeping the week-long yield gain to 5.5 basis points, mostly driven by the selloff seen on Wednesday after the Federal Reserve committed to hiking rates one more time this year. (http://www.marketwatch.com/story/still-on-course-fed-signals-one-more-rate-hike-in-2017-2017-09-20)

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See: Why this week's jump by 2-year Treasury yields is a 'big deal' for stock-market bulls (http://www.marketwatch.com/story/why-this-weeks-jump-by-2-year-treasury-yields-is-a-big-deal-for-stock-market-bulls-2017-09-22)

On Wednesday, the U.S. central bank kept its benchmark interest rate unchanged between 1% to 1.25%, but said it would begin its historic unwind of a more than $4.5 trillion balance sheet in October, as expected.

Twelve out of the 16 members of the policy-setting Federal Open Market Committee indicated they expected to deliver a rate increase--the third of the year--by the end of 2017 (http://www.marketwatch.com/story/still-on-course-fed-signals-one-more-rate-hike-in-2017-2017-09-20). Their forecasts also showed the fed funds rate would move to 2.1% by the end of 2018.

"The Fed is turning onto the more hawkish side, they're preserving their credibility on fighting future inflation," said George Goncalves, head of U.S. rates strategy at Nomura.

Fed Chairwoman Janet Yellen justified the Fed's support for higher rates by saying she expected tight labor markets to lead to a resurgence in inflation (http://www.marketwatch.com/story/feds-yellen-says-low-inflation-a-mystery-but-not-mysterious-enough-to-keep-rates-low-2017-09-20). The decision to raise rates as aggressively as the dot plot forecasts, senior Fed officials estimates of future interest rates, showed the central bank was looking to nip higher consumer prices in the bud.

North Korea's minister of foreign affair said the regime intended to test a hydrogen bomb in the Pacific Ocean. The country's leader Kim-Jong Un had warned of the "highest level of hard-line countermeasures in history," in response to President Donald Trump's announcement of new sanctions on North Korea.

Read:Kim Jong Un calls Trump 'mentally deranged U.S. dotard', setting off scramble for dictionaries (http://www.marketwatch.com/story/kim-jong-un-calls-trump-mentally-deranged-us-dotard-setting-off-scramble-for-dictionaries-2017-09-21)

Haven assets like the Japanese yen and gold strengthened along with U.S. government paper. The yen rose against the dollar by 0.4% to 112.03. While, gold prices rose 0.25% to $1298 per ounce, paring its decline after Wednesday's selloff.

"The flight-to-quality move overnight found its origin on the Korean Peninsula," wrote fixed-income strategists Ian Lyngen and Aaron Kohli BMO Capital Markets.

But assessing the market impact of geopolitical turmoil hasn't been straightforward. After the regime fired an intercontinental ballistic missile over Japan last Friday, investors looked past the show of force (http://www.marketwatch.com/story/short-dated-treasury-yields-rise-as-traders-await-data-deluge-fed-meeting-2017-09-15).

Investors mostly kept their eye on the docket of speeches by members of the Fed's interest-rate setting body, days after the central bank appeared to pay no heed to the softening inflation data as it kept its 2018 forecast unchanged (http://www.marketwatch.com/story/feds-yellen-says-low-inflation-a-mystery-but-not-mysterious-enough-to-keep-rates-low-2017-09-20).

Kansas City Fed President Esther George (http://www.marketwatch.com/story/feds-george-wants-to-put-qe-in-a-box-never-to-be-reopened-2017-09-22) said the recent raft of tepid inflation data should not derail the central bank's push to normalize interest rates, while Dallas Fed President Robert Kaplan said he was "open-minded" to the prospect of a December rate hike.

Earlier in the day, San Francisco Fed President John Williams said he expected subdued market reaction to the central bank's balance sheet reduction, which will kick off in October. He also added that the long-run interest rate could stay around 2.5% (http://www.marketwatch.com/story/feds-williams-says-normal-interest-rate-around-25-2017-09-22).

In Europe, the yield for the German 10-year government bond, a proxy for the eurozone, fell a basis point to 0.445%.

(END) Dow Jones Newswires

September 22, 2017 16:03 ET (20:03 GMT)