By Sunny Oh

10-year Treasury yield stays below 2.15%

Treasury yields ended mixed on Friday as investors await more data for clues to how aggressive the Federal Reserve will be in tightening monetary policy amid recent weakness in inflation data.

The yield for the benchmark 10-year note fell 0.7 basis point to 2.146%, contributing to a 1.1 basis point weekly drop. One basis point is one hundredth of a percentage point; bond prices move inversely to yields.

The 2-year note was relatively unchanged at 1.340%, rising 2 basis points for the week even after the Federal Reserve had hiked interest rates. The 30-year bond, or the bond, showed the most change and slipped 6.7 basis points for the week to 2.715%, but had only dropped 0.9 basis point for the day.

Yields were largely unchanged on Friday as Fed officials displayed diverging, but largely anticipated, opinions on the need for further monetary tightening. This is despite the hawkish tone of last week's policy statement, which hinted that the central bank was still on for one more rate increase and a balance sheet reduction by the end of the year.

St. Louis Fed President James Bullard, a nonvoting member of the central bank's interest-rate setting group and a well-known dove, said hiking interest rates may not be warranted in a "low growth, low-inflation and low-interest-rate regime." He also suggested the Fed could wait out new economic data and not "pre-empt any of them."

His remarks were in contrast to Cleveland Fed President Loretta Mester, a voter who is widely considered a monetary hawk, who said she wanted higher interest rates to prevent employment or inflation falling out of whack and that they would "keep the economy healthy, not to slow down the expansion," according to a Reuters report (https://www.reuters.com/article/us-usa-fed-mester-rates-idUSKBN19E22D). Fed Gov. Jerome Powell gave remarks at the Chicago Fed symposium on regulation but did not talk about monetary policy. Treasury yields showed little response to the remarks from Friday's Fed speakers.

Traders and analysts alike feel the last three months of deteriorating inflation data should warrant further caution from the Fed at the risk of running ahead of the curve. It's partly why the yield for the 10-year note has budged up a single basis point since June's quarter-point rate increase. Treasury yields should usually move higher in response to an interest-rate increase.

"There is a substantial risk that the Fed's opportunistic tightening campaign is a hawkish mistake, noted Joachim Fels, global economic adviser for Pacific Investment Management Co., or Pimco. "We are only one major adverse shock away from a serious deflationary scare."

Elsewhere, the Bank of England has faced discord within its ranks on whether it should tighten monetary policy to cool the economy as inflation rises and the pound weakens. Kristin Forbes, a retiring member of the U.K.'s monetary policy-setting group who has dissented in favor of higher rates, said her fellow committee members were "more hesitant to 'take away the punch bowl' and make the difficult decisions on inflation." U.K. inflation is nearing 3%.

The policy-sensitive 2-year U.K government bond touched an 8-month high of 0.257% in early morning trade Friday. Elsewhere, the 10-year German bond, or bund, was steady at 0.254%.

On the data front, reports were mixed. A "flash" reading of manufacturing purchasing managers index fell to a nine-month low in June (http://www.marketwatch.com/story/initial-manufacturing-pmi-falls-to-9-month-low-in-june-2017-06-23). The IHS Markit manufacturing index fell to a reading of 52.1 in June from 52.7 in May, a reading that still shows improving conditions as it's above the 50 mark. In a separate report, new-home sales were running at a seasonally adjusted annual rate of 610,000 in May, while past months' readings were revised up.

(END) Dow Jones Newswires

June 23, 2017 17:15 ET (21:15 GMT)

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