BOND REPORT: 2-year Treasury Yield Ends Above 2%, Highest Since 2008

Core inflation gauge rises more than expected in December

Treasurys weakened Friday, pushing the two-year yield above 2%, after a larger-than-expected rise in a key consumer-price measure underlined rising inflation expectations and dampened appetite for U.S. government paper.

What did Treasurys do?

The yield on the 2-year note, sensitive to changes in monetary policy expectations, rose 2.9 basis points to 2.001%, its highest finish since September. 2008. That contributed to a 4.1 basis point climb this week.

The yield for the 10-year benchmark note rose 2 basis points to 2.551%, extending a 7.5 basis point weeklong rise. While, the 30-year bond yield slipped 0.9 basis point to 2.855%, but saw a 4.3 basis points rise for the week.

Bond prices move inversely to yields.

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 forecast by economists surveyed by MarketWatch. 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.

See: 2-year Treasury yield hits crisis-era high on rising rate-hike prospects (http://www.marketwatch.com/story/2-year-treasury-yield-hits-crisis-era-high-on-rising-rate-hike-prospects-2018-01-12)

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, or even under way, 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.

What did market participants say?

"The [inflation report] does confirm the Fed's sentiment that low unemployment will translate into supported inflation numbers," said Arnim Holzer, strategist for EAB Investment Group. "We're beginning to see a pass-through of the effects of crude price increase into core CPI, which doesn't include them. But those expectations of higher oil prices become entrenched and do translate into core CPI eventually."

What other assets are on the move?

The German 10-year bond yield fell 2.1 basis points to 0.509%.

(END) Dow Jones Newswires

January 12, 2018 16:27 ET (21:27 GMT)