Bond Report: Treasury yields rise after solid core inflation reading affirms Fed pause

Treasury yields rose Wednesday after a key inflation report showed modest price pressures lingered in the U.S. economy even in the face of a global growth slowdown, affirming the Federal Reserve’s decision to hold back on further rate moves.

The 10-year Treasury note yield TMUBMUSD10Y, +0.77% was up 0.9 basis point to 2.693%, while the 30-year bond yield TMUBMUSD30Y, +0.52% was virtually unchanged at 3.023%. The 2-year note yield TMUBMUSD02Y, +0.98% sensitive to shifting expectations for Fed policy, rose 1.8 basis points to 2.522%. Bond prices move inversely to yields.

January’s consumer-price index was flat on a monthly basis, but showed an 0.2% increase in the core gauge. Analysts said soft gasoline and oil prices have muted inflation gains, but are unlikely to subdue the more resilient core gauge of the consumer-price index, which excludes volatile food and energy prices.

“The focus should be on the core inflationary readings, and they’re around the central bank’s 2% target. There is potential for it to grind higher. But for now, the current round of data just keeps the Fed on hold for the next few months,” said Eric Souza, senior portfolio manager at SVB Asset Management.

See: The rise of the robots and decline of inflation: How AI is keeping prices low

Read: Inflation? What inflation? Falling price pressures clear runway for economy in 2019

In the past few weeks, some have speculated that the rate-setting Federal Open Market Committee may be equally likely to cut rates as raising them later this year.

Indeed, last Wednesday, former Fed Chairwoman Janet Yellen said the central bank’s next action could be an interest-rate cut, especially if weak global growth starts to damage the U.S. economy and financial conditions tighten more. And in the most recent policy statement, the central bank moderated the phrasing on the need for further gradual increases to a more agnostic “future adjustments.”

But January’s inflation report could take the wind out of the bond-market’s growing bets that December represented the end of the tightening cycle, and the next move would be a rate cut, said Eddy Vataru, a portfolio manager at Osterweis Capital Management

Meanwhile, investors were set to see another round of speeches from the Fed on Wednesday. Cleveland Fed President Loretta Mester said if the economy performed to her expectations, the fed-funds rate could move higher, but downside risks could undercut the outlook for tighter policy. Philadelphia Fed President Patrick Harker said he expected one rate hike in 2019, and another the following year.

In trade talks, President Donald Trump said Tuesday that he was flexible with the eventual timeline of a deal with China if an agreement appeared close. Washington has stated the beginning of March was the deadline for trade negotiations to reach a deal when tariffs on $200 billion of Chinese imports are set to rise to 25% from 10%.

Chinese President Xi Jinping will meet U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin on Friday, according to sources talking to the South China Morning Post.

Also check out: For the stock market, a trade-war win may be a hollow victory

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