BOND REPORT: Treasury Yields Slip After Fed Sounds Worried Not On Subdued Inflation

Like Yellen, November Fed minutes strike dovish tone

Treasury prices rose on Wednesday, pulling yields lower, after the minutes from the November meeting of Federal Reserve policy makers reflected worries over subdued inflation, clouding the outlook for rate increases in 2018.

Financial markets will be closed Thursday for the Thanksgiving Day holiday, with stock and bond markets set for an early close on Friday.

What are yields doing?

The yield on the benchmark 10-year Treasury note slipped 4.1 basis points to 2.320%, while the yield on the 2-year note fell 3.8 basis points to 1.735%. The yield on the 30-year Treasury bond shed 2.1 basis points to 2.741%.

Yields and debt prices move in opposite directions.

What's driving markets?

The minutes from the Oct. 31-Nov. 1 meeting of the Federal Reserve Open Market Committee suggested a December rate increase remained on track, a move that is widely expected by market participants. Before the release of the minutes, traders in the fed fund futures market had priced in a 97% chance of a rate increase next month.

But the overall impression of the meeting's discussions were mostly dovish as some Fed officials said "there was some likelihood that inflation might remain below 2% for longer than they currently expected." That has thrown some doubt on whether the central bank will stick to the three planned rate increases in 2018.

See: Fed doubts on inflation grow, but rate hike likely soon, minutes show (http://www.marketwatch.com/story/fed-doubts-on-inflation-grow-but-rate-hike-likely-soon-minutes-show-2017-11-22)

Outgoing Federal Reserve Chairwoman Janet Yellen late Tuesday expressed concerns (http://www.marketwatch.com/story/yellen-says-inflation-below-2-goal-poses-one-of-the-biggest-challenges-to-fed-2017-11-21) about stubbornly below-target inflation, a phenomenon she described as one of the "biggest challenges" faced by policy makers. If inflation remains subdued, the impetus to raise and continue normalizing interest rates may not be apparent, she said.

Yellen is set to leave the Fed in February when her term as chairwoman ends. President Donald Trump has nominated Fed Gov. Jerome Powell to take her place at the helm of the central bank.

What are investors watching?

U.S. initial weekly jobless claims fell 13,000 to 239,000 for the week ending Nov. 18 (http://www.marketwatch.com/story/us-jobless-claims-sink-13000-to-239000-but-puerto-rico-still-a-sore-spot-2017-11-22). Economists polled by MarketWatch expected a 240,000 reading.

The University of Michigan said its consumer sentiment index fell to a reading of 98.5 (http://www.marketwatch.com/story/consumer-sentiment-in-november-was-second-strongest-in-13-years-2017-11-22) from October's 100.7, still the second-best reading in 13 years. Economists polled by MarketWatch had forecast a reading of 98.

U.S. durable goods orders fell 1.2% in October (http://www.marketwatch.com/story/us-durable-goods-orders-fall-12-in-october-in-whats-likely-a-temporary-setback-2017-11-22), its second drop this year, versus forecasts for a rise of 0.5%. While the headline number was a surprise, analysts said underlying details looked much better.

They highlighted that the gauge is notoriously volatile as large aircraft orders can influence the measure. Orders minus transportation rose 0.4% in October. Plus, the overall trend has been much better, with core orders climbing at an annual 14.5% pace in the past three months.

See:MarketWatch Economic Calendar (http://www.marketwatch.com/economy-politics/calendars/economic)

What are analysts saying?

"All policy makers were on board at the last meeting for a near-term (i.e. December) hike but their eyes are peeled for signs of higher inflation," said Jennifer Lee, senior economist for BMO Capital Markets.

Joseph LaVorgna, chief economist for Natixis CIB Americas, said the minutes contained a tinge of dovishness, as senior Fed officials highlighted concerns over anemic inflation.

(https://twitter.com/Lavorgnanomics/status/933411663868579840)

(END) Dow Jones Newswires

November 22, 2017 15:17 ET (20:17 GMT)