By Sara Sjolin, MarketWatch , Sunny Oh

Fed signals June hike, but won't be rushed by inflation

Treasurys extended a rally, pulling yields down further, after minutes released Wednesday from the Federal Reserve's early May meeting showed the central bank was willing to tolerate a short-term overshoot of its 2% inflation target.

Yields fell early in the session after investors rushed to buy havens such as bonds after comments from President Donald Trump sparked concerns of trade policies that could weigh on global growth.

What are Treasurys doing?

The two-year Treasury note yield, sensitive to expectations for monetary policy, slid 4.2 basis points to 2.528%, the largest one-day yield decline since March 1. Before the minutes' release, the maturity traded at 2.573%.

The 10-year note yield fell 6.3 basis points to 3.003%, pulling further away from the seven-year intraday high of 3.125% reached last Friday. The 30-year bond rate slipped 3.5 basis points to 3.169%, the largest one-day decline since April 27.

Bond prices move in the opposite direction of yields.

What is moving the market?

Investors turned their attention to minutes from the Federal Reserve's May 1-2 meeting, which was scrutinized for any hints on the number of rate rises this year. The minutes showed policy makers thought the Fed was on track for a June rate increase.

But a few market participants said the minutes featured a dovish tone, as the repeated emphasis that its 2% inflation target was symmetric suggested that the Fed was willing to allow inflation to temporarily push above the target without incurring an additional intervention from the Fed. Members of the rate-setting committee said an inflation overshoot "could be helpful" in the minutes.

A few policy makers also appeared to play down the importance of a flattening yield curve as a signal of slowing growth. Analysts had speculated that the central bank would pause its rate increase trajectory if the yield curve was in the danger of inverting, a well-documented recession indicator.

Earlier on Wednesday, investors dashed into assets considered more safe -- such as U.S. government paper -- after Trump's latest comments on North Korea and the China trade talks. The president said late Tuesday there is a "very substantial chance" the historic meeting between him and North Korea's leader Kim Jong Un won't happen in June as planned (http://www.marketwatch.com/story/trump-says-summit-with-north-koreas-kim-may-happen-later-than-scheduled-2018-05-22) unless Pyongyang meets certain conditions.

See: How this global stock-market selloff shows that Trump still calls the tune (http://www.marketwatch.com/story/global-stock-market-selloff-shows-trump-still-calls-the-tune-2018-05-23)

Separately, Trump said Tuesday that he was "not satisfied" with the latest round of trade talks with China (http://www.marketwatch.com/story/trump-today-president-suggests-world--class-poker-player-xi-to-blame-for-shift-in-north-koreas-attitude-about-summit-2018-05-22). Signs of an easing in tensions between the world's two largest economies has spurred risk-on moves in financial markets earlier this week, with stocks rallying and bonds selling off.

See:MarketWatch's economic calendar (http://www.marketwatch.com/economy-politics/calendars/economic)

What's going on in Italy?

The yield on 10-year Italian bonds jumped 5.6 basis points to 2.375% on Wednesday. The rise came as President Mattarella confirmed the 5 Star Movement and League's choice of prime minister (http://www.marketwatch.com/story/italy-president-asks-giuseppe-conte-to-form-government-reports-2018-05-23), put forward on Monday evening.

As one of most indebted economies in the eurozone, a new Italian government's willingness to widen its budget deficit through tax cuts and spending boosts have added to concerns over the creditworthiness of its sovereign paper.

What are strategists saying?

"We didn't get any sense of hawkishness from the minutes. There was little concern about asset prices, inflation, overheating, and there's a bit of a dissonance here, there's a market reflecting a hawkish Fed, and a Fed that isn't hawkish," said John Bellows, portfolio manager at Western Asset Management.

"The FOMC remains dovish and will continue to go very slow in raising rates as they won't feel the urge to go more aggressively even in the face of what is a clear rise in inflation and inflationary pressures. The symmetry comments give them internal cover for that," said Peter Boockvar, chief investment officer at Bleakley Advisoy Group.

"The Italian government is not forming like investors thought it would. They're still lacking a premier to run the country. Then we have this currency crisis in Turkey, and we have somewhat of a likelihood the North Korean U.S. summit doesn't go off as planned. As a result, you have a flight to quality that started from Europe in both Germany and U.K., which bled into our market," said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

(END) Dow Jones Newswires

May 23, 2018 16:10 ET (20:10 GMT)