The U.S. government bond market ended an eventful week on a quiet note Friday, with yields holding roughly flat after declining earlier in week in response to soft inflation data.
The yield on the benchmark 10-year Treasury note settled at 2.157%, compared with 2.160% Thursday and 2.201% the previous Friday.
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Yields fall when bond prices rise.
After drifting slightly higher overnight, yields snapped back Friday morning after new data showed an unexpected decline in housing starts. Overall, it was a fairly uneventful session, a possible sign of things to come given a lack of major economic data for the next couple of weeks.
Many investors and analysts now say that the direction for Treasury yields will be largely dictated by inflation data. In light of recent reports, many investors doubt the Federal Reserve will be able to follow through on its plan of raising interest-rates at least once more this year. Further signs that inflation is stuck below the Fed's 2% target would bolster this skepticism, leading to lower Treasury yields, while stronger data would have the opposite effect, investors and analysts say.
Over the past week, the bond market staged a major rally in response to the latest lackluster inflation reading. An announcement from the Fed that it was raising short-term interest-rates and sticking with its tightening plan for the rest of the year only led to a partial retracement of the initial move.
Ultimately, inflation data is "the only real catalyst" that could substantially alter the market, said Scott Kimball, portfolio manager of BMO TCH Core Plus Bond Fund.
While Fed officials have argued that the recent downturn was likely caused by temporary factors, "the market is viewing it as more of a challenge," he said.
One gauge of inflation expectations, the 10-year break-even rate, which measures the yield premium on the 10-year Treasury note relative to the 10-year Treasury inflation-protected security, has dropped in recent weeks. On Friday, it implied investors expect an annual inflation rate of 1.676% over the next 10 years, down from 1.819% on May 31, according to Tradeweb.
In addition to influencing monetary policy, inflation poses a direct threat to government bonds by chipping away their fixed returns over time. As a result, bond prices tend to go up when inflation expectations go down.
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(END) Dow Jones Newswires
June 16, 2017 16:14 ET (20:14 GMT)