U.S. government bonds strengthened Tuesday as investors flocked to assets traditionally considered safe and reassessed the future path of interest rate increases.
The yield on the benchmark 10-year Treasury note fell to a 2017 low of 2.072% compared with 2.157% on Friday, in the largest one-day decline since May. Yields fall as bond prices rise.
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The yield on the 10-year note settled at its lowest level since Nov. 9, 2016, the day after the U.S. presidential election. The decline highlights the continuing demand for government debt after the benchmark yield fell in August for a second consecutive month.
Many factors pushed bond yields lower Tuesday, analysts said. U.S. stock declines led investors to assets considered safe, while Federal Reserve Governor Lael Brainard made comments perceived as dovish at the Economic Club of New York.
Ms. Brainard noted that inflation hasn't hit the Fed's 2% annual target over the past five years, and that a "persistent shortfall in inflation" could mean that it is "prudent to raise the federal-funds rate more gradually."
She also said that Hurricane Harvey raised "uncertainties" about the economic outlook in 2017, potentially having an effect on GDP this quarter.
These comments come after the price index for personal-consumption expenditures showed last week that inflation remains tepid, highlighting hurdles that the Fed might face in sticking to its path of rate increases. Inflation is a threat to long-term government bonds because it erodes the purchasing power of their fixed payments.
Fed funds futures, used by traders to place bets on central bank policy, showed a 32% chance of a rate rise by year-end late Tuesday, down from 47% a month ago.
Investors also sought assets perceived as relatively safe after geopolitical stresses that emerged over the weekend, preparing for what could be a month fraught with risks, some analysts said.
Those include tensions between North Korea and the U.S. as well as a difficult stretch for lawmakers, who must prevent default on the nation's debt and keep the government running. The Trump administration is also seeking approval for a $7.85 billion recovery package for Hurricane Harvey.
Major U.S. stock indexes fell on Tuesday. Gold for September delivery rose 1.1% to $1339.20 a troy ounce, reaching its highest settle value since September.
Government bonds reacted to "what's going on in Asia and the potential for some stalemates in Washington," said Scott Buchta, head of fixed-income strategy at Brean Capital.
In a sign of heightened anxiety over the debt ceiling deadline, yields on government debt expiring in October remain elevated over notes expiring in November, according to Tradeweb. Bonds with longer maturities typically yield more than those due sooner.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
September 05, 2017 16:45 ET (20:45 GMT)