Treasurys Strengthen as Fed Minutes Show Policy Debate -- Update

By Sam GoldfarbFeaturesDow Jones Newswires

U.S. government bonds rebounded Wednesday after two days of declines as minutes from the Federal Reserve's July meeting reaffirmed that some officials are hesitant to raise interest rates while inflation remains subdued.

The yield on the 10-year Treasury note settled at 2.224%, compared with 2.264% Tuesday. Yields fall when bond prices rise.

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Fed officials meeting in July were divided about how to respond to sagging inflation, the minutes showed. Some felt the Fed could "afford to be patient" in raising interest-rates, while others worried there could be a spurt in inflation that could be difficult to control.

While not "terribly unexpected," the minutes cast further doubts on whether Fed officials will raise interest rates again this year "because of their concern about the path that inflation was taking," said Donald Ellenberger, head of multisector strategies at Federated Investors.

Soft inflation helps boost Treasurys by preserving the purchasing power of their fixed payments and decreasing the likelihood that the Fed will raise interest rates.

Wednesday's minutes provided the latest sign of disagreement among Fed officials.

On Monday, New York Fed President William Dudley said in an interview with the Associated Press that he expected a third interest-rate increase this year partly because rising asset prices showed a need to do more to tighten financial conditions. That came after Federal Reserve Bank of Dallas President Robert Kaplan said Friday that he wanted to "see more evidence" of firming inflation before raising interest rates.

After a modest two-day selloff, Treasurys initially got a boost Wednesday from a Reuters report that European Central Bank President Mario Draghi won't make any major policy announcements next week when he speaks at the Fed's Jackson Hole Conference.

Reports that Mr. Draghi would speak at the conference had previously fueled speculation that he might use the occasion to signal how the central bank might scale back its bond-buying program, which has helped keep a lid on bond yields globally by limiting the supply of government debt.

Treasury yields also ticked lower along with U.S. stocks following reports that two advisory councils to President Donald Trump were disbanding after Mr. Trump's controversial responses to the recent violence in Charlottesville, Va.

Signs of turmoil at the White House have, at times, tempered investors' risk-appetite this year, bolstering bonds as investors lower their expectations for policies that could spur higher economic growth and inflation.

Bond prices had declined earlier this week partly in response to easing tensions between the U.S. and North Korea. Investors also responded to solid economic data, including a better-than-expected report on retail sales on Tuesday.

Still, the response from the bond market was relatively muted, indicating investors remain focused on soft inflation data and potential economic pitfalls such as looming deadlines for Congress to extend government funding and raise the debt ceiling.

Write to Sam Goldfarb at

(END) Dow Jones Newswires

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