BOND REPORT: Treasury Yields Remain Higher As Yellen Reiterates Case For Rate Rise

By Mark DeCambre and William Watts, MarketWatch Features Dow Jones Newswires

Janet Yellen says the Fed should be wary of 'moving too gradually'

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U.S. Treasury prices declined slightly Tuesday, nudging yields up, as Federal Reserve Chairwoman Janet Yellen reiterated the case for further rate increases despite inflation running below the central bank's target.

On Monday, yields had fallen as escalating tensions sparked by a flare-up in aggressive rhetoric between the U.S. and North Korea inspired some buying of so-called haven assets, including gold futures and government paper.

The benchmark 10-year Treasury yield rose less than a basis point to 2.229%, while the 2-year Treasury note yield rose 1.5 basis points to 1.44%. The 30-year bond yield added 1.2 basis points to 2.771%.

Bond prices and yields move in opposite directions.

Yellen, in a speech in Cleveland, said the Fed should be wary of "moving too gradually" (http://www.marketwatch.com/story/yellen-says-fed-should-be-wary-of-raising-rates-too-gradually-2017-09-26) due to risks that the labor market could overheat, resulting in inflation and prices rising too rapidly.

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"In short, Dr. Yellen offered nothing to suggest that she sees any reason to delay raising rates until next year, though she was cautious, as usual, to avoid offering hostages to fortune," said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note.

Fed-funds futures traders are penciling in a roughly 78% chance the central bank will deliver its third rate rise of 2017 in December. Expectations for such a move were reinforced by the Fed's policy statement following its meeting last week and by remarks Yellen made at the time at a news conference.

The Treasury Department sold $26 billion of two-year notes at auction. The sale was "relatively impressive" coming less than half an hour after Yellen's remarks inspired significant flattening of the yield curve, said Thomas Simons, senior money market economist at Jefferies, in a Tuesday note.

The yield curve is line plotting yields across maturities. The curve can flatten as the spreads between yields of different maturities narrow or steepen as the spreads widen.

Earlier in the session, U.S. Case-Shiller home prices (http://www.marketwatch.com/story/home-price-gains-accelerate-in-july-as-a-reminder-of-the-housing-bubble-stirs-to-life-2017-09-26) rose 5.9% in July, compared with a 5.8% increase in June. Meanwhile, August new home sales slipped to an annual rate of 560,000 (http://www.marketwatch.com/story/new-home-sales-swoon-to-8-month-low-in-august-2017-09-26), below the 585,000 consensus and 580,000 reported in July.

The September consumer-confidence index narrowly exceeded the MarketWatch consensus (http://www.marketwatch.com/story/consumer-confidence-dips-after-hurricanes-irma-harvey-but-optimism-in-us-still-high-2017-09-26), coming in at 119.8, versus 119.5 expected and 120.4 in the previous month.

Check out:MarketWatch's Economic Calendar (http://www.marketwatch.com/economy-politics/calendars/economic)

On the geopolitical front, the lack of fresh threats of conflict in the Korean Peninsula on Tuesday, after Pyongyang's foreign minister issued a warning in New York on Monday that his country would shoot down U.S. warplanes even if they were outside the nation's airspace, helped to check further bond buying. The U.S. has dismissed North Korea's claim that recent comments over Twitter from President Donald Trump represented a declaration of war (http://www.marketwatch.com/story/north-korean-official-says-us-has-declared-war-2017-09-25-13103598).

Mounting military tensions and a surprise result in Germany's general election, helped to fuel overall haven buying sentiment on Monday, pressuring yields. Although German Chancellor Angela Merkel's center-right Christian Democrats came in first in the country's weekend election, support for her party fell, while antiestablishment parties increased their profile, raising questions about the political landscape in Germany and the integrity of the euro and the European Union.

Read:German election result revives eurozone jitters as investors turn attention to Spain (http://www.marketwatch.com/story/german-election-result-revives-eurozone-jitters-as-investors-turn-attention-to-spain-2017-09-25)

The German 10-year government bond, or bund, a proxy for eurozone health, edged 0.3 basis point higher to 0.406%.

(END) Dow Jones Newswires

September 26, 2017 17:20 ET (21:20 GMT)