U.S. Government Bonds Gain on Soft Inflation Data
October 11 2018 - 12:02PM
Dow Jones News
By Daniel Kruger
U.S. government bond prices rose Thursday after the Labor
Department said inflation slowed in September.
The yield on the benchmark 10-year Treasury note fell to 3.167%,
according to Tradeweb, from 3.221% Wednesday. Yields fall as bond
prices rise.
Yields declined after the Labor Department said Thursday that
the consumer-price index rose 0.1% in September. Economists
surveyed by The Wall Street Journal expected consumer prices to
rise 0.2%. The muted reading suggests that the Federal Reserve
might not feel pressure to speed up its pace of interest-rate
increases, analysts said.
With inflation remaining "quite contained," Fed officials
"should be pretty pleased with the result" of their policy of
gradually raising interest rates, said Christopher Sullivan, chief
investment officer at the United Nations Federal Credit Union.
"It's the bond traders who haven't managed the shift from a
deflationary kind of environment to a more normalized kind of
environment."
Policy makers penciled in one more rate increase at their
meeting in September, and three increases for 2019. Investors early
Thursday scaled back bets that the Fed will take an aggressive
approach to raising interest rates in the coming year, after the
release of the inflation data.
Fed funds futures, which investors use to bet on the path of
central bank interest-rate policy, showed that the odds that policy
makers will raise rates three times by June 2019 declined after the
inflation report to 37% from 41% Wednesday. Should the Fed raise
rates at that pace, it would represent a continuation of its policy
of boosting its target rate once each quarter.
Bond investors could be becoming overconfident in their ability
to understand how the Fed will react to upcoming events, according
to Ian Lyngen, head of U.S. government bond strategy at BMO Capital
Markets.
While the Fed has stuck to its policy of gradually raising rates
this year, the backdrop for their decisions was one of
accommodative policy and robust financial conditions, Mr. Lyngen
said. As the Fed continues to raise rates, and as the central
bank's balance sheet continues to shrink at the pace of about $50
billion a month, it could become more difficult for policy makers
to look past turbulent market conditions to continue with rate
increases, he said.
Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
October 11, 2018 11:47 ET (15:47 GMT)
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