By Akane Otani
The yield on the benchmark 10-year U.S. Treasury note, which affects everything from mortgage rates to corporate loans, rose to new four-year highs Wednesday after consumer-price data showed inflation continuing to firm.
Increases in consumer prices in recent months have fed concerns among investors that long-dormant inflation could be accelerating. At the same time, some investors worry an expanding federal budget deficit could lead to an oversupply of bonds in the market.
That backdrop made Wednesday's data on consumer prices particularly important for traders, many of whom feared an unexpectedly strong reading that sent bond yields jumping could send global markets reeling again. Inflation poses a threat to bond prices because it chips away at the value of the securities' fixed payments.
In recent weeks, such fears caused investors to sell bonds, which led yields to rise, pressuring shares from New York to Tokyo.
"Much of the 2017 market environment rested on a number of assumptions which are now being repeatedly challenged -- in this case, the assumption that inflation was 'dead,'" said James Athey, senior investment manager at Aberdeen Standard Investments.
Yields rose early Wednesday after the Labor Department said its consumer-price index, a measure of what Americans pay for everything from theater tickets to breakfast cereal, rose 0.5% in January, while so-called core prices -- which exclude the volatile food and energy categories -- rose 0.3%.
Economists surveyed by The Wall Street Journal had expected CPI to rise by 0.4% and core prices to increase by 0.2%.
The stronger-than-expected pickup in prices sent bond yields to fresh multiyear highs, with the 10-year Treasury note climbing to 2.913%, the highest closing level since Jan. 9, 2014, compared with 2.837% Tuesday.
Yet the reaction in other markets was more sanguine, a contrast to two weeks ago, when a leap in bond yields sent asset prices around the world tumbling.
U.S. stocks bounced higher, further chipping away at the losses that had sent them into correction territory earlier this month. Meanwhile gold, which typically suffers when investors expect higher rates and inflation, notched its biggest one-day percentage gain since March.
The U.S. dollar, which tends to rise with inflation expectations, headed for its fourth consecutive decline, deepening its losses for the year.
However, the extra yield investors demand for holding junk-rated debt remains near multiyear lows, even after ticking higher lately.
Some analysts said the relative calm in other markets partly reflected skepticism about whether January's figures pointed to longer-term pickup in inflation, as opposed to transitory gains in prices. For instance, apparel prices rose at the fastest pace since 1990 in January, which some analysts blamed on cold weather across the U.S., while gasoline prices -- which have since retreated from earlier highs -- also helped drive inflation higher.
"We're not talking about runaway inflation," said Putri Pascualy, portfolio manager and senior credit strategist at Pacific Alternative Asset Management Co. Rather, investors are seeing the latest tick-up in prices as having come from "a context where inflation was nonexistent."
The Federal Reserve's preferred measure of inflation, the price index for personal-consumption expenditures, has largely undershot the central bank's 2% target, suggesting there is still room for prices to rise.
Some investors also said the relatively gradual pace of bond yield increases in recent sessions appeared to be keeping pressure off other markets. The yield on the 10-year note, for instance, posted a bigger one-day move on Feb. 7, a day before U.S. stocks fell into correction territory.
Treasury yields have yet to reach levels that many say could mark the start of a more severe bond selloff. Many investors and analysts have said a yield of 3% or higher on the 10-year Treasury would mark the point at which bonds could pose a threat to stocks. For years, those have looked attractive to yield-seeking investors because of ultralow interest rates around the world.
The last time the yield on the 10-year note closed above the 3% level was the end of 2013.
Still, others remain concerned that a faster-than-expected pickup in prices could hurt bonds by pushing the Federal Reserve to pick up its pace of interest-rate increases.
After the Labor Department's report, federal-funds futures, used by traders to place bets on the course of interest rates, showed a slightly higher chance of the Fed accelerating its pace of rate increases in 2018. The market is now pricing in a roughly 26% chance of at least four interest-rate increases by year-end, according to data from CME Group, compared with 17% one day ago.
That put pressure on bonds carrying shorter maturities, sending yields higher.
The yield on the two-year Treasury note, which tends to be highly sensitive to the path of the Federal Reserve's interest rates, jumped Wednesday to 2.173%, compared with 2.104% Tuesday, settling at the highest level since Sept. 12, 2008.
Meanwhile, the yield on the five-year Treasury note, rose to 2.640%, its highest close since April 6, 2010.
--Daniel Kruger contributed to this article
Write to Akane Otani at firstname.lastname@example.org
(END) Dow Jones Newswires
February 14, 2018 17:15 ET (22:15 GMT)
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