BOND REPORT: Treasury Yields Travel Higher Ahead Of Key Housing Number

Fed officials insist conditions remain ripe for further tightening even as bond investors downgrade prospects for inflation

Treasury yields rose slightly before the release of a key housing number that could influence the thinking of senior Federal Reserve officials as a showdown over the need for monetary tightening amid falling inflation looms between the bond market and the central bank.

The yield for the 2-year Treasury note, sensitive to changes in Fed monetary policy, gained 1.7 basis point to 1.365%. Bond prices move inversely to yields; one basis point is one hundredth of a percentage point.

The 10-year note added 1.3 basis point to 2.173%, while the 30-year bond was up 0.8 basis point to 2.748%.

Traders will turn their attention to the monthly release of existing home sales numbers at 10 a.m. Eastern. After "abysmal" housing starts data last week, investors will be watching whether the trend of weaker-than-expected economic data remains transitory, wrote Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets.

Fed officials have insisted conditions remain ripe for further tightening of monetary conditions this year even as bond investors have downgraded prospects for inflation. The 5-year forward inflation expectation rate (https://fred.stlouisfed.org/series/T5YIFR), the bond market's assessment of future price growth, has fallen to 1.78% after hovering above 2% for most of the first quarter in 2017.

See: Inflation falls again in May as CPI recedes from recent high-water mark (http://www.marketwatch.com/story/inflation-falls-again-in-may-as-cpi-recedes-from-recent-high-water-mark-2017-06-14)

"The existing home sales number, which represents the bulk of housing sales in the U.S. and is less volatile than the new home sales series, will help showcase whether the one-off explanations are correct or whether the trend in housing is no longer the Fed's friend," Lyngen said.

Meanwhile, Bank of England chief economist Andrew Haldane said recent U.K. economic data was "still on track" and could set up some monetary tightening there in the second half of the year. Considered a dove, his hawkish turn comes after governor Mark Carney said lingering questions over the strength of inflationary pressures meant more interest-rate hikes could be premature, especially as policy uncertainty over a messy Brexit, the split between the U.K. and the European Union, continues to overshadow the U.K. economy.

U.K. 10-year government paper, or gilts, rose sharply 3.8 basis points on his comments. Elsewhere in Europe, the German 10-year government bond was little changed at 0.263%.

See: Brexit threatens to become a fiasco - and investors are in denial (http://www.marketwatch.com/story/brexit-threatens-to-become-a-fiasco-and-investors-are-in-denial-2017-06-19)

Also read: Pound climbs above $1.27 on hawkish view by Bank of England's chief economist (http://www.marketwatch.com/story/pound-hits-2-month-low-as-doubts-over-support-for-uk-government-weigh-2017-06-21)

(END) Dow Jones Newswires

June 21, 2017 09:53 ET (13:53 GMT)