U.S. Government Bonds Rise After Soft Inflation, Fed Rate Increase

U.S. government bond prices rose Wednesday after data showed inflation pressures remain muted and the Federal Reserve raised short-term interest rates as expected.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.353%, compared with 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 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.

Bond yields then extended gains after the Fed said it would raise its benchmark federal-funds rate by a quarter percentage point.

Investors and traders had widely expected the central bank to announce an interest-rate increase. Something that did surprise some analysts: the fact that two Fed committee members voted against a December rate increase.

The move represented the first double dissent at a 2017 Fed meeting, and could foreshadow more disagreement in 2018 over the pace of rate increases given a streak of soft inflation data, some analysts said.

"I'm not sure what else they needed to see for a December hike," said JJ Kinahan, chief market strategist at TD Ameritrade. With measures including household spending, business investment and the unemployment rate pointing to the U.S. economy continuing to strengthen, Mr. Kinahan expects wage growth -- something that has been muted this year -- to pick up in 2018.

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

(END) Dow Jones Newswires

December 13, 2017 15:58 ET (20:58 GMT)