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U.S. Government Bonds Rise on Low Inflation Data

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01/11/2019 | 12:56pm EDT

By Daniel Kruger

U.S. government-bond prices rose Friday after government data showed that consumer prices declined in December.

The yield on the benchmark 10-year Treasury note fell to a recent 2.697%, according to Tradeweb, from 2.731% Thursday.

Yields, which fall when prices rise, declined after the Labor Department said Friday that consumer prices contracted by 0.1% from the previous month. Excluding food and energy, which are more volatile, prices rose 0.2%. Both figures matched the predictions of economists in a Wall Street Journal survey.

The recent decline in the price of oil has played an important role in containing inflation. Friday's report showed an index of energy prices fell 3.5% in December, led by a seasonally adjusted 7.5% decline in gasoline costs. Gas prices for U.S. drivers were $2.37 a gallon on average in December, down 28 cents, or nearly 11%, from $2.65 in November, according to the U.S. Energy Information Administration. Retail gasoline prices have dropped from a nearly four-year high of $2.90 a gallon in May.

The data suggests that rising inflation isn't a threat to growth and could give Federal Reserve officials the latitude to pause from their recent program of raising interest rates once per quarter and instead hold them at their current range of 2.25% to 2.50%, analysts said.

Fed-funds futures, which investors use to bet on the direction of central bank policy, show a 19% probability that officials will raise interest rates by the end of the year, according to CME Group data. That's down from 56% a month ago. Investors see a 14% chance that officials reduce rates by the end of the year.

"Once the pause starts, it's just going to continue," said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management. "There are too many questions about the global economy that need to be resolved," which will prevent the Fed from raising rates, he said.

The Fed will likely keep interest rates at current levels, Mr. Heppenstall said.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

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