BOND REPORT: 2-year Treasury Yield Pushes Above 2% For First Time Since Sep. 2008

By Sunny Oh Features Dow Jones Newswires

Core CPI rose 0.3% in December. Economists were expecting the core CPI gauge to show a 0.2% gain.

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Treasury yields advanced on Friday after a solid consumer-price-index reading helped to affirm rising inflation expectations and dampened appetite for U.S. government paper.

How are Treasurys doing?

The 2-year rate, sensitive to changes in monetary policy, popped higher to 2.014%, from 1.972% late Thursday, according to Tradeweb.

The yield for the 10-year benchmark note climbed to 2.583%, from 2.531%, while the 30-year bond yield was higher at 2.894%, versus 2.863%.

Bond prices move inversely to yields.

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What's driving the market?

Treasury yields popped higher after core consumer prices rose 0.3% (http://www.marketwatch.com/story/gimme-shelter-cpi-rises-01-in-december-mostly-on-higher-housing-costs-2018-01-12), compared with the 0.2% gain economists from MarketWatch had forecast. Stronger price pressures can erode the value of long-dated debt, paring demand for U.S. government paper. Moreover, stronger inflation numbers should give the Federal Reserve confidence to raise interest rates this year at a steady clip, which can also be bearish for bonds.

Traders are closely eyeing the inflation data to see if the rise in investor-based gauges of inflation expectations, as measured through Treasury-inflation protected securities, or TIPS, will come to fruition. Break-even rates have risen to 2%, the central bank's price target. Amid talk of whether a bear market in bonds is nigh, a resurgence in the consumer-price index would add to the growing feeling that the 10-year Treasury yield will finally break higher in 2018, after doing little last year.

Retail sales rose 0.4% in Decembe (http://www.marketwatch.com/story/holiday-retail-sales-a-case-of-haves-havenots-2018-01-12)r on a brisk holiday shopping season, but slightly below the MarketWatch forecast of 0.5%. It nonetheless marked the fourth straight gain.

See: Why U.S. inflation data will be a litmus test for bond market (http://www.marketwatch.com/story/why-us-inflation-data-will-be-a-litmus-test-for-bond-buyers-2018-01-09)

What did market participants say?

"[Core CPI], along with the solid retail sales report for the same month...supports our expectation for a March rate hike by the Fed," said Jennifer Lee, senior economist for BMO Capital Markets, in a note.

(http://www.marketwatch.com/story/euro-hits-3-year-high-on-breakthrough-for-german-coalition-talks-dollar-weak-ahead-of-data-2018-01-12)

(END) Dow Jones Newswires

January 12, 2018 09:15 ET (14:15 GMT)