DB Deutsche Bank Aktiengesellschaft

By Sam Goldfarb 

U.S. government bonds pulled back modestly Friday as speculation over the health of Deutsche Bank AG continued to influence price moves.

In recent trading, the yield on the benchmark 10-year Treasury note was 1.569%, according to Tradeweb. It was 1.556% Thursday and dropped as low as 1.536% overnight. Yields rise when bond prices fall.

Bond yields were on course to rise Thursday but reversed in the afternoon after reports that some Deutsche Bank clients had withdrawn excess cash and positions held at the bank. Momentum from that trade carried into the overnight session but abated as the U.S. markets opened.

Adding to the choppy trading was some mixed economic data, as a new report showed flat consumer spending in August but a slight firming of inflation.

The personal-consumption expenditures price index, the Federal Reserve's preferred inflation measure, rose only 0.1% in August from the prior month and 1.0% from a year earlier. But core prices, which exclude the volatile categories of food and energy, were up 1.7% from a year earlier, a small uptick from previous months.

Overall, the report "provides more evidence of "the stability and the continued upward grind in inflation," said Aaron Kohli, interest-rate strategist at BMO Capital Markets. Inflation is "still not quite at levels that would make the Fed super aggressive but is certainly heading to a path where that looks more likely in the future."

The bond market stands to get some support Friday from month-end and quarter-end demand. Financial institutions and money managers typically prefer liquid assets for their balance sheets at the end of a quarter. In addition, at the end of a month, fund managers who track these indexes need to replicate the adjustments by buying bonds, creating demand.

Bonds have been on something of a roller coaster in recent weeks, having pulled back earlier this month on concerns that major central banks might abruptly tighten their monetary policies, and then rallied after the Fed held off on raising rates and the Bank of Japan also kept the bulk of its policies intact.

In recent days, government bond prices have declined as OPEC reached an understanding to cut oil production, lifting oil prices and inflation expectations. But prices climbed again as Deutsche Bank's woes raised concerns about European banking system, sparking flight to safer assets.

Many analysts expect the yield on the 10-year Treasury note to rise modestly heading into the end of the year, but few expect any sharp rise in yields unless global economic growth picks up considerably.

Federal-funds futures, which are used to place bets on central-bank policy, showed Friday that investors and traders see a 53% chance that the Fed will raise interest rates at its December meeting, according to CME Group.

Even if the Fed does lift rates in December, however, it isn't expected to aggressively tighten policy next year.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

September 30, 2016 11:00 ET (15:00 GMT)

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