3-13-18 9:21 AM EDT | Email Article

By Mark DeCambre, MarketWatch

U.S. government bonds saw buying on Tuesday, pulling yields lower, as an inflation report matched expectations, easing concerns the Federal Reserve would speed up its pace of rate hikes from a widely expected three to a more aggressive four.

How are Treasurys performing?

The 10-year Treasury note yield was down by 3.1 basis points to 2.839%, according to Tradeweb data. The 2-year note yield , the maturity that is the most sensitive to shifting inflation expectations, fell 2 basis points to 2.246%. The 30-year bond rate , known as the long bond, was down by 2.4 basis points to 3.107%.

Bond prices fall as yields rise and vice versa.

What's driving government bond trading?

The consumer-price index in February rose 0.2%, in line with MarketWatch economists' expectations. The core gauge, stripping out for volatile food and energy prices, was up by 0.2%. The humdrum data could become another piece of evidence keeping the central bank from pushing for a more aggressive pace of rate hikes.

See: Consumer inflation less threatening in February, CPI shows (http://www.marketwatch.com/story/consumer-inflation-less-threatening-in-february-cpi-shows-2018-03-13)

Inflation readings have become a closely watched gauge of the state of the market's health over the past several weeks because rising prices and inflation can erode a bond's fixed value. Percolating inflation can also prompt the U.S. central bank to lift interest rates more aggressively than the three times that traders and strategists have penciled in for 2018.

The Fed doesn't rely solely on the CPI to determine if inflation is high enough to justify an increase in interest rates, but it plays a crucial role, along with the central bank's preferred personal-consumption expenditures inflation gauge. That indicator is showing inflation rising at 1.7% yearly clip.

Previously, inflation has been running below the Fed's 2% annual target, which has helped support buying in government paper, keeping a lid on yield gains.

A report on February jobs showed that wage growth, one measure of inflation, showed a muted pace of gains, and an amended report for wages in the previous month was reduced to a 12-month increase in pay at 2.6% from 2.8%, helping to spark a rally in the Dow Jones Industrial Average and the S&P 500 index . Those more subdued figures assuaged some jitters that hatter-than-expected inflation would cause selling in bonds, pushing yields up and causing a rise in borrowing costs to undercut appetite for stocks that have enjoyed a protracted period of ultralow rates.

Concerns about tariffs signed by President Donald Trump continue to be a concern for the broader market, with the threat that it might spark global trade wars and impede the U.S. economy in its ninth year of expansion.

Read:What to watch in the CPI report (http://www.marketwatch.com/story/what-to-watch-in-the-cpi-report-2018-03-12)

(http://www.marketwatch.com/story/what-to-watch-in-the-cpi-report-2018-03-12)And: The overheating economy could crash in 2019, this top forecaster says (http://www.marketwatch.com/story/the-overheating-economy-could-crash-in-2019-this-top-forecaster-says-2018-03-10)

What are strategists and traders saying?

"All in, a largely as expected February inflation report that likely isn't going to move the market or Fed expectations much, but some upside lies ahead for the core inflation rate," said Robert Kavcic, senior economist for BMO Capital Markets.

What else is on investors' radar?

Secretary of State Rex Tillerson has been replaced by CIA Director Mike Pompeo (http://www.marketwatch.com/story/trump-says-he-will-replace-tillerson-with-pompeo-as-secretary-of-state-2018-03-13), highlighting the rapid turnover and climate of turmoil surrounding the White House.

Which other assets are in focus?

The German 10-year government bond yield were at 0.613% on Tuesday compared with 0.631% late Monday. German bonds, also known as bunds, are often viewed as a proxy for the health of the eurozone.

Meanwhile, the ICE U.S. Dollar Index was down 0.1%, while gold prices (http://www.marketwatch.com/story/gold-slips-as-dollar-firms-ahead-of-cpi-report-that-could-shift-fed-rate-hike-pace-2018-03-13) rose.


(END) Dow Jones Newswires

March 13, 2018 09:21 ET (13:21 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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