U.S. Government Bonds Weaken as Investors Evaluate New Fed Leadership

By Gunjan Banerji Features Dow Jones Newswires

U.S. government bonds weakened Friday as investors responded to strong economic data and the prospect of new leadership at the Federal Reserve.

Continue Reading Below

The yield on the benchmark 10-year Treasury note rose to 2.328% from 2.309% on Thursday, capping off its biggest one-month gain since November. Yields rise as bond prices fall.

Yields rose after data Friday showed that the Chicago Purchasing Manager Index hit its highest level in three months, a sign of optimism among firms about business conditions.

That number "caught investors by surprise," said Jeff MacDonald, head of fixed-income strategies at Fiduciary Trust Company International.

Yields extended gains after reports that President Donald Trump and Treasury Secretary Steven Mnuchin met with former Federal Reserve Governor Kevin Warsh on Thursday to discuss his potential nomination as the next Fed chairman. Investors may perceive Mr. Warsh as more inclined to raise interest rates than other candidates, analysts said.

Mr. Trump and the Treasury Secretary also interviewed Federal Reserve governor Jerome Powell on Wednesday.

Continue Reading Below

Signs of progress by Republicans in Congress toward a broad overhaul of the tax code has helped buoy yields this week. While the plan has skeptics, an overhaul could boost growth and inflation and also increase the size of the budget deficit, all of which could have a negative impact on bond prices, some analysts said.

Still, signs of weak inflation persist. Earlier, yields on 10-year Treasurys briefly dipped after new data showed that consumer spending was soft in August.

Personal-consumption expenditures, a measure of spending on everything from food to medical expenses, rose 0.1% in August from a month earlier, according to the Commerce Department. Adjusted for inflation, consumer spending fell 0.1% in August from the prior month, the first decline since January.

"This morning's inflation report reminds the market that we still have a pretty muted inflation environment that continues to disappoint investors," Mr. MacDonald said.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

September 29, 2017 17:15 ET (21:15 GMT)