Treasurys Pause After Fed Leaves Rates Unchanged -- Update

By Akane Otani Features Dow Jones Newswires

U.S. government bonds stalled Wednesday after the Federal Reserve held interest rates steady as expected.

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The yield on the benchmark 10-year U.S. Treasury note was recently at 2.372%, according to Tradeweb, compared with 2.374% Tuesday. Yields fall as bond prices rise.

Bond yields pared declines from earlier in the session after the Fed left short-term interest rates unchanged but signaled it would consider lifting them before the end of the year.

Fed officials expect "that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate," the Federal Open Market Committee's statement said.

Heading into Wednesday, investors and analysts had widely expected the rate decision and said their focus would be on any changes to officials' views on inflation, which has become a subject of debate within the central bank in recent months.

The Fed's preferred price gauge, the personal-consumer expenditures price index, has run under the central bank's 2% annual target for seven months.

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The tepid readings have led some Fed officials to say they won't support another rate rise before seeing evidence that inflation is picking up -- something that some analysts and investors say could keep Treasurys trading within a narrow range for longer.

"Eventually, the Fed has to acknowledge in some shape or form that the price pressures just aren't as strong as they may have been anticipating, " said Charlie Diebel, head of rates at Aviva Investors.

While Mr. Diebel, among other investors, thinks the Fed is likely to push forward with its plan to raise rates in December, he believes further signs of weakness in inflation could put more pressure on the Fed to ease its plans for rate rises in 2018.

At their September policy meeting, Fed officials suggested they expect three rate increases in 2018, two in 2019 and one in 2020 -- a path some analysts said looked hawkish, given the lag in price increases.

"If inflation continues to undershoot, an aggressive Fed just doesn't look warranted," Mr. Diebel said.

Earlier Wednesday, bond yields fell after data showed a closely watched gauge of U.S. manufacturing activity pulled back from a 13-year high.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

November 01, 2017 15:14 ET (19:14 GMT)