U.S. Government Bonds Strengthen Ahead of Inflation Reading

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03/12/2018 | 09:36 pm

By Akane Otani

U.S. government bond prices rose Monday ahead of a key inflation reading that investors hope will shed light on whether price pressures are increasing.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.870%, compared with 2.894% Friday.

Yields, which fall as bond prices rise, slipped overnight, then extended their declines after the Treasury Department auctioned off $21 billion in 10-year notes at a slightly higher yield than expected.

Heading into the auctions, some investors had worried that tepid demand could stoke renewed selling of the 10-year note, whose yield has crept back to near its highest level of the year in recent sessions. Yet trading volumes were relatively low throughout the day, analysts say, suggesting that investors are largely looking past the auction results and focusing on Tuesday's consumer prices report.

Economists surveyed by The Wall Street Journal expect the consumer-price index, which measures what Americans pay for everything including prescription medication and breakfast cereal, to increase by 0.2% in February, down from 0.5% in January.

The report on January consumer prices, which caught many investors and analysts off guard, had sent the yield on the 10-year note jumping to a multiyear high, as some worried that the data could pressure the Federal Reserve to pick up its pace of interest-rate increases. Inflation can reduce bonds' attractiveness by chipping away at the purchasing power of their fixed returns.

The central bank has penciled in three interest-rate increases for the year. Some investors believe that number could shift to four: the market late Monday priced in a 33% chance of the Fed raising short-term interest rates four times by the end of the year, according to federal-funds futures tracked by CME Group, up from 16% one month ago.

A stronger-than-expected pickup in prices could renew selling pressure for Treasurys, although many remain skeptical that prices have begun to rise at a pace that would threaten the markets.

"As long as inflation stays contained, it's going to be difficult for the Fed to hike too aggressively -- but of course we're always looking to see what the next threat is, and that's one of the major concerns for the year," said Tom Anderson, chief investment officer at Boston Private Wealth.

Write to Akane Otani at akane.otani@wsj.com

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