U.S. Government Bonds Edge Lower After Monday's Gains

U.S. government bonds edged lower Tuesday as investors registered a muted reaction to Federal Reserve Chairwoman Janet Yellen's latest speech on inflation and monetary policy.

The yield on the benchmark 10-year Treasury note settled at 2.229%, compared with 2.220% Monday.

Yields, which rise when bond prices fall, ticked higher in the morning but were roughly flat after Ms. Yellen reiterated that Fed officials are inclined to raise interest rates at a gradual pace despite the fact that inflation remains below their 2% annual target.

Ms. Yellen allowed that the Fed's understanding of inflation is "imperfect" and suggested the central bank could change its posture if inflation doesn't pick up as officials anticipate. But she also said it would be "imprudent to keep monetary policy on hold" given the risk that inflation could rise faster than expected.

Several analysts said the speech offered few surprises, coming shortly after Ms. Yellen delivered a similar message at the conclusion of the Fed's policy meeting last Wednesday.

Yields on longer-term Treasury debt have climbed off 2017 lows hit at the start of the month, as investors assigned a greater likelihood to the Fed raising interest rates for a third-time this year in December. Yet yields remain low even by this year's standards, reflecting a widespread view that the persistence of slow growth and lackluster inflation is likely to keep the Fed to a very gradual pace of rate increases.

While there are strong arguments for why yields should be higher than where they are now, the "market needs a bigger catalyst" to break out of its current range, said Bruno Braizinha, senior interest rates strategist at Société Générale SA.

Fed officials indicated last week that they still expect to raise rates once more this year and three times next year. But their median projection for the longer-run level of interest rates edged down to 2.75% from 3% in June -- lower than the endpoint of previous rate-rising cycles.

Demand for Treasurys softened a day after the 10-year yield responded to heightened tensions between the U.S. and North Korea and a surprisingly strong showing by a nationalist party in the German elections by logging its largest one-day decline since Sept. 7.

Analysts attributed the pullback Tuesday in part to looming debt sales. The Treasury Department on Tuesday afternoon sold $26 billion of two-year notes. It is scheduled to auction five-year notes Wednesday and seven-year notes on Thursday.

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

(END) Dow Jones Newswires

September 26, 2017 16:26 ET (20:26 GMT)