BOND REPORT: Treasury Yields Erase Gains After Consumer-inflation Report
December 13 2017 - 9:38AM
Dow Jones News
By Mark DeCambre, MarketWatch , Sunny Oh
Federal Reserve is expected to raise rates for third time this
year
Treasury yields retreated on Wednesday after a report on
inflation came in line with expectations, but cast some doubt
Federal Reserve's willingness to hike rates aggressively next
year.
The inflation reading comes ahead of the Fed's key decision that
is anticipated to result in the third interest-rate increase of
2017. Investors in government paper are expected to focus on the
central bank's inflation outlook and its assessment of the health
of the U.S. economy, both of which will factor in the pace of
policy normalization in 2018.
What are Treasury yields doing?
The yield on the 10-year Treasury note was at 2.374%, compared
with 2.403% late Tuesday in New York. The yield was as high as
2.42% earlier in the session. The 2-year note yield , the most
sensitive to interest-rate policy, was at 1.819%, versus 1.829% in
the previous session, while the yield of the 30-year bond was at
2.751%, compared with 2.782% on Tuesday.
Bond prices and yields move inversely.
What's driving the bond market?
The consumer-price index rose 0.4% in November, matching
MarketWatch economists' forecasts. But investors reacted to the
smaller 0.1% gain in the so-called core rate of inflation that
strips out for food and energy. Economists polled by MarketWatch
had predicted core inflation to hit 0.2% this month.
The dollar and Treasury yields reversed course after rising
earlier in the day, as the data affirmed expectations that the
weakness in inflation would continue, and make Fed members more
cautious about future interest-rate hikes next year. Still,
investors said the tepid reading wouldn't deter the Fed from hiking
rates later Wednesday.
Stubbornly low inflation, running below the Fed's annual 2%
target, has been a focus for bond investors because rising
inflation can diminish the future value of fixed-income assets.
Muted inflation levels have held long-dated bond yields, the most
attuned to shifts in the inflation outlook, in check throughout
2017.
See: Higher gas prices boost inflation, squeeze paychecks in
November, CPI finds
(http://www.marketwatch.com/story/higher-gas-prices-boost-inflation-squeeze-paychecks-in-november-cpi-finds-2017-12-13)
Wall Street is anticipating that the Fed's policy-setting
Federal Open Market Committee will raise short-term interest rates
by a quarter percentage point to a range of 1.25% and 1.5%, the
fifth such increase since the Janet Yellen's central bank began
raising rates from near zero at the end of 2015. An updated policy
statement, and Fed members' projections for future interest rates,
known as the dot plot, will be released at 2 p.m. Eastern Time.
Yellen is scheduled to field questions from reporters a half-hour
later in her final news conference before she retires and is
replaced by Fed. Gov. Jerome Powell.
Investors will be eager to hear the Fed's expectations for
economic growth, especially in light of House and Senate
lawmakers's efforts to pass a potentially business-boosting tax
policy.
What are market participants saying?
"As we highlighted recently, we expect the FOMC to be rather
neutral for U.S. yields. A hike in December is a done deal and we
do not expect changes in the 'dots'," wrote analysts at UniCredit
in a Wednesday research note
(https://www.research.unicredit.eu/DocsKey/economics_docs_2017_162946.ashx?M=D&R=54890432).
"Despite what may be said in the statement and presser today,
the lack of robustness of inflation data very much brings the
continued hawkishness of the Fed into question," said Aaron Kohli,
fixed-income strategist at BMO Capital Markets.
What else is on investors' radar?
Both the Bank of England and the European Central Bank meet on
Thursday. U.K. inflation rose at an annual rate of 3.1% in
November, providing some support to the notion that puzzling
inflation may beginning to normalize.
What are other assets doing?
The German 10-year government bond yield was at 0.312%, compared
with 0.297% on Tuesday, while the U.K. 10-year bond yield was at
1.215%, versus 1.205% in the prior session.
(END) Dow Jones Newswires
December 13, 2017 09:23 ET (14:23 GMT)
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