U.S. Government Bonds Hold On to Gains After Fed Raises Rates

FeaturesDow Jones Newswires

U.S. government bonds strengthened Wednesday ahead of a policy announcement from the Federal Reserve.

The yield on the benchmark 10-year U.S. Treasury note was recently at 2.374%, according to Tradeweb, compared with 2.403% Tuesday.

Continue Reading Below

Yields, which fall as bond prices rise, slipped early Wednesday after Labor Department data showed continued signs of weakness in inflation.

The consumer-price index, which measures what Americans pay for everything from coffee to prescription drugs, rose 0.4% in November, in line with what economists surveyed by The Wall Street Journal had expected.

But core prices, which exclude the more volatile categories of food and energy, rose just 0.1% in November, missing economists' estimates for a 0.2% increase. That suggested inflation pressures remain muted on the whole, some bond analysts said, helping push Treasury yields lower.

Inflation tends to weaken demand for government bonds, since it chips away at the purchasing power of their fixed returns.

"The lack of robustness of inflation data very much brings the continued hawkishness of the Fed into question," Aaron Kohli, interest-rates strategist at BMO Capital Markets, said in a note.

The Fed concludes its two-day policy meeting later Wednesday. Bond investors and traders are widely expecting the central bank to announce an interest-rate increase, with federal-funds futures tracked by data provider CME Group showing a 100% chance of at least one rate hike by year-end.

With a December rate hike all but priced into the markets, analysts say they will be focusing on any clues the Fed provides on its expected rate path for 2018 and beyond. A pickup in the pace of rate rises could pressure stocks and bond yields while sending the U.S. dollar higher, investors say.

Write to Akane Otani at akane.otani@wsj.com

U.S. government bonds held on to gains Wednesday after the Federal Reserve raised short-term interest rates in a decision widely anticipated among investors and analysts.

The yield on the benchmark 10-year U.S. Treasury note was recently at 2.370%, according to Tradeweb, compared with 2.378% before the release of the decision and 2.403% Tuesday.

Yields, which fall as bond prices rise, slipped early Wednesday after Labor Department data showed continued signs of weakness in inflation.

The consumer-price index, which measures what Americans pay for everything from coffee to prescription drugs, rose 0.4% in November, in line with what economists surveyed by The Wall Street Journal had expected.

But core prices, which exclude the more volatile categories of food and energy, rose just 0.1% in November, missing economists' estimates for a 0.2% increase. That suggested inflation pressures remain muted on the whole, some bond analysts said, helping push Treasury yields lower.

Inflation tends to weaken demand for government bonds, since it chips away at the purchasing power of their fixed returns.

"Any time you have core inflation come in softer than expected, it invites a little bit of uncertainty as to how aggressively the Fed can move," said Joe Tanious, investment strategist at Bessemer Trust.

The Fed concluded its two-day policy meeting Wednesday. Bond investors and traders had widely expected the central bank to announce an interest-rate increase, with federal-funds futures tracked by data provider CME Group showing a 100% chance of at least one rate hike by year-end before the announcement.

Federal Reserve Chairwoman Janet Yellen is expected to address the press in a conference later Wednesday. Analysts say they will be focusing on any clues the Fed provides on its expected rate path for 2018 and beyond.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

December 13, 2017 14:47 ET (19:47 GMT)