Treasurys Prices Fall as Fed Seen Still Hawkish on Inflation

U.S. government bonds weakened Monday as investors assessed the potential for tighter monetary policy in the wake of weaker-than-forecast inflation data.

The yield on the benchmark 10-year U.S. Treasury note rose to 2.309%, its biggest single-day gain since Sept. 27, from 2.280% Friday. The two-year note yield, which is more sensitive to expectations for Federal Reserve policy, rose to 1.542%, the highest since October 2008, from 1.496% Friday. Yields rise as bond prices fall.

Yields gained after Fed Chairwoman Janet Yellen suggested Sunday that she remains inclined to continue raising interest rates, even though continued economic growth hasn't been accompanied by rising inflation. At a banking conference in Washington, Ms. Yellen said her "best guess" was that inflation would pick up next year as the labor market strengthens further.

Bonds had strengthened late last week after the consumer-price index, a measure of what Americans pay for everything from haircuts to food, rose 0.5% in September, its biggest jump since January, but below the 0.6% forecast by economists in a Wall Street Journal survey. Core prices, which exclude volatile food and energy costs, rose just 0.1% -- below the 0.2% that economists surveyed by The Journal had forecast.

Inflation is a major threat to long term government bonds because it erodes the purchasing power of their fixed payments and can spur the Fed to raise interest rates.

Minutes of the Fed's September meeting released last week showed central bankers are grappling with how to balance their desire to return monetary policy to pre-crisis norms amid a backdrop of persistently slow price increases. Officials said the path of rate increases ahead will depend on how the economy behaves. According to the Fed's preferred measure of inflation, U.S. consumer prices rose 1.4% in August from a year earlier, well below the central bank's 2% target.

"The hawkish-leaning Fed people are still stuck on the idea that they want to raise rates," said Andrew Brenner, head of global fixed income at NatAlliance Securities in New York.

Write to Daniel Kruger at

(END) Dow Jones Newswires

October 16, 2017 16:09 ET (20:09 GMT)