U.S. Government Bonds Gain as Catalonia Concerns Return

By Daniel Kruger Features Dow Jones Newswires

U.S. government bonds gained Thursday as investors sought assets perceived as relatively safe after tensions heightened between the Spanish government and the Catalan independence movement.

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The yield on the benchmark 10-year Treasury note fell to 2.323% from 2.339% Wednesday. The yield has fallen in four of the past six sessions. Yields fall as bond prices rise.

After Catalonia's leaders on Thursday defied an ultimatum from Madrid by failing to abandon their push for independence, Spanish Prime Minister Mariano Rajoy called an extraordinary cabinet meeting for Saturday, where the government is expected to invoke a never-before-used article of Spain's constitution to reduce some of the region's autonomy.

Investors also bought Treasurys as they focused on the potential for inflation to remain sluggish no matter whom President Donald Trump designates as his choice to lead the Federal Reserve. Potential picks include Fed governor Jerome Powell, White House economic adviser Gary Cohn, Stanford economics professor John Taylor and former Fed governor Kevin Warsh. Mr. Taylor and Mr. Warsh are seen by analysts as significantly more hawkish than Chairwoman Janet Yellen, who is also being considered.

Ms. Yellen herself has been more aggressive in trying to restore monetary policy to precrisis norms than many investors had expected. At their meeting last month, policy makers forecast that they could raise interest rates in December and three more times in 2018, even though the measure of inflation tracked by the Fed was 1.4% in August, below its 2% target.

Ms. Yellen has attributed the sluggish pace of consumer prices to transitory factors, and said she expects inflation to return to the central bank's target. Inflation erodes the purchasing power of a bond's fixed interest payments over time.

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"There's a fair amount of hawkish sentiment coming out of the Fed," said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP. "Unless we do get some real inflation, you'd expect" longer-term yields to fall relative to short-term yields.

(END) Dow Jones Newswires

October 19, 2017 17:00 ET (21:00 GMT)