Treasurys Strengthen as Odds of Rate Increase Fall

U.S. government bonds pared early gains Friday as investors closely followed geopolitical tensions over the North Korean nuclear threat.

In recent trading, the yield on the 10-year Treasury note was 2.210%, according to Tradeweb, compared with 2.211% Thursday. Yields fall when bond prices rise.

The 10-year yield was roughly flat after twice falling below 2.2%, first in the overnight session as investors responded to escalating tensions between the U.S. and North Korea by flocking to safer assets and then following the latest in a run of lackluster inflation reports.

Treasurys pulled back from the second rally after media reports that Russia couldn't accept North Korea having nuclear weapons and was working with China to diminish the threat.

The sharp twists and turns in the market showed how much North Korea has come to occupy bond investors after a period in which geopolitical matters had become a secondary concern to economic data.

"The last 24 hours have finally brought a big enough change, particularly in global equities, that bonds do have a real reason to hit these recent lows" in yields, said Jim Vogel, interest-rates strategist at FTN Financial.

Amid the flurry of North Korea headlines, new data showed Friday the consumer price index increased 0.1% in July from the previous month, below the 0.2% gain anticipated by economists surveyed by The Wall Street Journal. Excluding the categories of food and energy, so-called core prices also rose just 0.1%, compared with the 0.2% forecast.

Soft inflation data has been a major factor in pushing down Treasury yields in recent months, causing investors to scale back their expectations for future interest-rate increases from the Federal Reserve.

Rising inflation is a main threat to government bonds because it erodes the purchasing power of their fixed returns and can lead the Fed to raise benchmark interest rates.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

U.S. government bonds strengthened Friday as soft inflation data led investors to further scale back expectations for interest-rate increases from the Federal Reserve.

Investors bought bonds after the Labor Department said the consumer price-index increased 0.1% in July from the previous month, below the 0.2% gain anticipated by economists surveyed by The Wall Street Journal.

Reinforcing the impact of the report, Federal Reserve Bank of Dallas President Robert Kaplan said later Friday that he wanted to "see more evidence" that inflation is on track to reach the Fed's 2% annual target before raising interest rates for a third time this year. Mr. Kaplan had previously said his base case was for three interest-rate increases this year, in line with the median forecast of Fed officials.

The yield on the benchmark 10-year Treasury note settled at 2.191%, its lowest close since June 26, compared with 2.211% Thursday. The yield on the two-year note, which is more sensitive to changes in interest-rates, fell to 1.294% from 1.335%. Yields fall when bond prices rise.

Friday's report was the latest in a string of lackluster inflation readings, which have surprised many investors who entered the year betting on an upsurge in economic growth and inflation.

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.

Federal-funds futures, used by investors to place bets on the Fed's rate-policy outlook, on Friday showed a roughly 36% chance of a rate-increase by the end of the year, down from 47% Thursday and 54% a month ago, according to CME Group data.

Investors are "discounting the Fed's ability to continue tightening against a relatively weak inflation backdrop," said Mark Cabana, U.S. rates strategist at Bank of America Merrill Lynch in New York.

Though the outlook for monetary policy eventually took center stage, shifting attitudes toward the North Korean nuclear threat also helped drive swings in the bond market Friday.

Investors initially flocked to Treasurys and other safe-assets in the overnight session amid continued concerns about escalating tensions between the U.S. and North Korea. By the opening of the U.S. trading session, however, that flight-to-safety had abated, with stocks bouncing back after three days of declines.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

August 11, 2017 16:22 ET (20:22 GMT)