By Daniel Kruger 

U.S. government bond prices fell Tuesday after signs that solid economic growth may be starting to generate inflation.

The yield on the benchmark 10-year U.S. Treasury note yield rose for a fourth consecutive session, settling at 2.403% from 2.387% Monday. Bond yields rise as prices fall.

Yields climbed after a gauge of U.S. business prices showed signs of inflation building within the economy. The producer-price index for final demand, which measures changes in the prices that U.S. companies receive for their goods and services, increased a seasonally adjusted 3.1% in November from a year earlier, the Labor Department said Tuesday. That is the biggest jump in nearly six years.

Inflation is a threat to long-term government bond prices because it erodes the purchasing power of the debt's fixed payments. The Labor Department releases data on the consumer-price index Wednesday, which economists expect to rise 0.4% in November from a month earlier.

Bond yields have traded in a narrow range recently amid signs inflation remains muted. The Federal Reserve's preferred inflation gauge rose 1.6% in October from a year earlier, according to the Commerce Department, and the annual inflation reading has remained below the Fed's 2% target for the best part of 5 1/2 years.

Fed officials are likely to raise their benchmark short-term rate Wednesday by a quarter-percentage point to a range between 1.25% and 1.5%. Investors are looking to see whether policy makers raise their projections for three rate increases in 2018.

"We're going to see higher rates and a Fed that's a bit more aggressive, " said Larry Milstein, managing director of government and agency trading at R.W. Pressprich & Co.

Should policy makers signal a desire to raise rates a fourth time in 2018, that could help push the 10-year yield above 2.42%, which served as an upward barrier for several months, and propel the yield into the 2.75%-3% range, he said.

 

(END) Dow Jones Newswires

December 12, 2017 16:56 ET (21:56 GMT)

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