U.S. Government Bonds Fall on Inflation Signs

By Daniel Kruger Features Dow Jones Newswires

U.S. government bond prices fell Tuesday after signs that solid economic growth may be starting to generate inflation.

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The yield on the benchmark 10-year U.S. Treasury note yield rose to 2.417%, according to Tradeweb, from 2.387% Monday. Bond yields rise as prices fall.

Yields climbed after the Labor Department said the producer-price index for final demand, which measures changes in the prices that U.S. companies receive for their goods and services, increased a seasonally adjusted 0.4% in November from a month earlier. This matched expectations of economists surveyed by The Wall Street Journal.

Inflation is a threat to long-term government bond prices because it erodes the purchasing power of the debt's fixed payments. The Labor Department releases data on the consumer-price index Wednesday, which economists expect to rise 0.4% in November from a month earlier.

Bond yields have traded in a narrow range recently amid signs inflation remains muted. The Federal Reserve's preferred inflation gauge rose 1.6% in October from a year earlier, according to the Commerce Department, and the annual inflation reading has remained below the Fed's 2% target for the best part of 5 1/2 years.

Fed officials are likely to raise their benchmark short-term rate Wednesday by a quarter-percentage point to a range between 1.25% and 1.5%. Investors are looking to see whether policy makers raise their projections for three rate increases in 2018.

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"We're going to see higher rates and a Fed that's a bit more aggressive, " said Larry Milstein, managing director of government and agency trading at R.W. Pressprich & Co.

Should policy makers signal a desire to raise rates a fourth time in 2018, that could help push the 10-year yield above 2.42%, which served as an upward barrier for several months, and propel the yield into the 2.75%-3% range, he said.

Write to Daniel Kruger at daniel.kruger@wsj.com

U.S. government bond prices fell Tuesday after signs that solid economic growth may be starting to generate inflation.

The yield on the benchmark 10-year U.S. Treasury note yield rose for a fourth consecutive session, settling at 2.403% from 2.387% Monday. Bond yields rise as prices fall.

Yields climbed after a gauge of U.S. business prices showed signs of inflation building within the economy. The producer-price index for final demand, which measures changes in the prices that U.S. companies receive for their goods and services, increased a seasonally adjusted 3.1% in November from a year earlier, the Labor Department said Tuesday. That is the biggest jump in nearly six years.

Inflation is a threat to long-term government bond prices because it erodes the purchasing power of the debt's fixed payments. The Labor Department releases data on the consumer-price index Wednesday, which economists expect to rise 0.4% in November from a month earlier.

Bond yields have traded in a narrow range recently amid signs inflation remains muted. The Federal Reserve's preferred inflation gauge rose 1.6% in October from a year earlier, according to the Commerce Department, and the annual inflation reading has remained below the Fed's 2% target for the best part of 5 1/2 years.

Fed officials are likely to raise their benchmark short-term rate Wednesday by a quarter-percentage point to a range between 1.25% and 1.5%. Investors are looking to see whether policy makers raise their projections for three rate increases in 2018.

"We're going to see higher rates and a Fed that's a bit more aggressive, " said Larry Milstein, managing director of government and agency trading at R.W. Pressprich & Co.

Should policy makers signal a desire to raise rates a fourth time in 2018, that could help push the 10-year yield above 2.42%, which served as an upward barrier for several months, and propel the yield into the 2.75%-3% range, he said.

(END) Dow Jones Newswires

December 12, 2017 16:56 ET (21:56 GMT)