U.S. Government Bonds Edge Higher Before Fed Rate Decision

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06/13/2018 | 07:12 pm

By Daniel Kruger

U.S. government bond prices edged higher Wednesday ahead of the conclusion of the Federal Reserve's meeting at which officials are expected to raise interest rates for the second time this year.

The yield on the benchmark 10-year Treasury note fell to 2.957%, according to Tradeweb, from 2.959% Tuesday. The two-year Treasury yield, which is more responsive to expectations for Fed interest-rate policy, rose to 2.545% from 2.539%. Yields fall as bond prices rise.

Yields swung between gains and losses as investors awaited guidance about whether policy makers see enough pressure on prices to increase their projected pace of interest rate increases, or whether concerns about the ability of the economy to sustain its growth in coming years might lead to a pullback in forecasts of rate increases in coming years, analysts said.

In December, Fed officials had penciled in three rate increases in 2018 and two more in 2019. They raised their 2019 forecast in March to three increases, as growth and inflation showed signs of continued strength. Fed funds futures, which investors use to bet on the path of Fed monetary policy, indicate a 45% likelihood that Fed officials raise rates four times this year, according to CME Group data.

The moves in yields have been notably modest, even as the week has been populated with important data and events that many expected last week would be market-moving. President Donald Trump and North Korean leader Kim Jong Un met to begin ironing out issues ranging from reversing North Korea's nuclear capabilities to reducing U.S. sanctions. The government sold $68 billion of notes and bonds, receiving demand that was above recent averages.

"Everybody's been waiting for the Fed," said Larry Milstein, head of Treasury and agency trading at R.W. Pressprich & Co.

Yields rose briefly after the Labor Department said Wednesday that the producer-price index rose more than forecast, jumping 0.5% in part because of higher energy prices, compared with a 0.3% forecast by economists in a Wall Street Journal survey of economists. The consumer-price index rose 2.8% last month from the prior year, the strongest annual reading since February 2012, when inflation was 2.9%, the department said Tuesday.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

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