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Treasurys Weaken After CPI Report

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01/12/2018 | 10:15pm CEST
By Akane Otani 

U.S. government-bond prices edged lower Friday, pushing the yield on the two-year note above 2%, after inflation data beat expectations.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.551%, compared with 2.531% Thursday and 2.476% at the end of last week.

The yield on the two-year note, which is especially sensitive to interest-rate increases from the Federal Reserve, settled at 2.001%, compared with 1.972% Thursday -- marking the first time it closed above 2% since September 2008.

Bond yields, which rise as prices fall, traded in a narrow range overnight, then jumped after Labor Department data showed the consumer-price index, which measures changes in the prices Americans pay for everything from breakfast cereal to airline fares, ticked up 0.1% in December from the prior month.

The gain was even more pronounced when excluding the often-volatile categories of food and energy: so-called core prices increased by 0.3% in December, marking the biggest one-month jump since January 2017.

Separately, Commerce Department data showed U.S. retailers posting their strongest year of sales growth since 2014 for the year just ended.

The reports put pressure on bond prices, which tend to suffer when inflation and economic growth pick up. Inflation chips away at the purchasing power of bonds' fixed returns and firming inflation could make it easier for the Fed to raise interest rates.

"One of the big questions going into today was whether the [CPI] print would strengthen or weaken the case for as many as three interest-rate increases this year," said Bill Northey, chief investment officer at the private client group at U.S. Bank. "In our view, it underscored the thesis that inflation is starting to move into the zone the Fed is calling for."

A streak of largely muted inflation data had helped support demand for bonds throughout 2017. The yield on the 10-year note ended last year at 2.409%, down from 2.446% 12 months earlier.

More recently, however, investors have become more confident that inflation will rise to the Fed's 2% annual target, with recently-passed tax cuts expected to boost economic growth at a time when it was already showing signs of improvement.

Federal-funds futures, used by investors to place bets on the Fed's rate-policy outlook, showed late Friday a 49% chance that the Fed will raise rates at least three-times this year, up from 44% Thursday and 36% at the end of last year, according to CME Group data.

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

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