U.S. Government Bonds Rise as Weak Inflation Persists

By Gunjan BanerjiFeaturesDow Jones Newswires

U.S. government bonds rose Thursday, as the prospect of continued weak inflation lingered despite growth in Americans' spending and incomes.

Strong appetite for Treasurys spurred a second consecutive month of yield declines for benchmark 10-year Treasurys. The yield on the benchmark 10-year Treasury note fell to 2.122% from 2.145% on Wednesday, marking the lowest closing level since Nov. 10, 2016. Yields fall when bond prices rise.

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In August, 10-year Treasury notes recorded the largest one-month yield decline since June 2016.

A recent pickup in consumer spending hints the economy continued its momentum into the second half of the year, with a lift in incomes giving Americans more cash and potentially more confidence. But one measure released Thursday showed that weak inflation continues to hang in the backdrop, despite other positive growth measures. Such weakness could hinder the Federal Reserve's plans for further rate increases, investors say.

Personal spending, which measures what Americans spend on items such as cars to clothes, rose in July from the prior month and recorded its strongest jump since April, according to the Commerce Department. Personal income, which reflects wages and investment earnings, grew 0.4%, the biggest move up since February.

The price index for personal-consumption expenditures, which is the Fed's preferred inflation gauge, grew 0.1% in July. But the annual rate remained at 1.4%, down from 2.2% earlier this year and below the Fed's 2% annual target.

"It's hard to see inflation taking off to the upside," said Julien Scholnick, a portfolio manager at Western Asset Management. Mr. Scholnick said other economic growth figures have been more encouraging than the continued weak inflation data, which tempers investors' expectations for higher interest rates.

Inflation is a threat to Treasurys because it chips away at the purchasing power that their fixed payments offer.

Investors also await the Labor Department's employment report on Friday for a fuller picture of the economy.

A jobless-claims report released Thursday morning showed the number of Americans applying for first-time unemployment benefits rose last week. Initial jobless claims ticked up by 1,000 to a seasonally adjusted 236,000 for the week ended Aug. 26, according to the Labor Department. That was in line with what economists surveyed by The Wall Street Journal expected.

Filings for jobless claims could lurch higher in coming weeks as a result of Hurricane Harvey.

Robust demand has supported Treasurys all week as bonds got an added lift from month-end buying. Some portfolio managers purchase Treasurys in the last trading session of a month to replace maturing debt with fresh bonds to accurately follow the indexes they track.

Strong demand for five-year Treasurys at an auction pushed government bond prices higher at the beginning of the week. Geopolitical fears fueled by North Korea firing a missile over Japan have also underpinned investor interest in the government debt.

Still, some say the recent lows in Treasury yields won't last.

"We expect that to change direction and drift higher as some of these one-off risks abate," said Charles Ripley, investment strategist at Allianz Investment Management, of the downward trajectory in bond yields.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

August 31, 2017 17:05 ET (21:05 GMT)