By Ryan Vlastelica
U.S. CPI up 0.3% in December
Treasury prices declined Wednesday, pushing up yields, a day ahead of the European Central Bank's first policy meeting of 2017, which could shed some light on European monetary policy in a year likely to be driven by geopolitical events.
The yield on the 10-year Treasury note rose 4.2 basis points to 2.364%, while the two-year yield picked up 2 basis points to 1.17%. The yield on the 30-year Treasury bond rose 4 basis points to 2.968%. All three tenures have seen yields slip in three of the past four trading days.
Yields also got a bump from the most recent read on U.S. consumer prices (http://www.marketwatch.com/story/inflation-climbs-in-2016-at-fastest-pace-in-5-years-cpi-shows-2017-01-18), which rose in December.
At the ECB's last meeting, the central bank extended its bond-buying program by nine months, although it reduced the pace of its purchases beyond March. The minutes of the bank's December policy meeting showed that officials wanted to remain present in bond markets during a year in which "volatility could easily emerge, relating in particular to shocks emanating from the political environment." Any additional details on the political or monetary environment will be closely watched, especially given that President-elect Donald Trump will be sworn in as the U.S.'s 45th president on Friday.
However, some investors aren't expecting much in the way of fresh insights from Mario Draghi's ECB.
"We don't expect anything new out of the ECB, but we are waiting for that. In general, we have a bearish bias towards Treasurys and expect a further selloff," said Marc-Henri Thoumin,rates strategist at Société Générale. "We expect inflation to keep rising, and think this will be the driver for the coming year."
Yields have been in a steady uptrend over the past six months, ever since the 10-year touched an all-time low around 1.36% in July, though the move accelerated after the November election of Trump, whose policies, including ramping up fiscal spending, are expected to stoke inflation. Rising inflation erodes a bond's fixed payments. Typically, when inflation is on the rise, bond investors demand higher yields to compensate for the corrosive effect that higher prices have on real returns.
However, the gain in yields appears to have stalled of late, with yields retreating from a recent high near 2.6% hit in mid-December.
In the latest U.S. inflation reading, the Consumer Price Index rose 0.3% in December, while core CPI, which excludes food and energy, rose 0.2%. The index rose 2.1% over all of 2016, its fastest pace since 2011. Separately, industrial production rose 0.8% in December (http://www.marketwatch.com/story/industrial-production-sees-strongest-rise-in-two-years-in-december-2017-01-18), rising by the largest amount in two years.
The CPI data matched news out of Europe (http://www.marketwatch.com/story/inflation-picks-up-across-the-eurozone-2017-01-18), where only one of the eurozone's 19 members saw a decline in consumer prices in December. The European Union's statistics agency said Wednesday that consumer prices were 0.5% higher than in November, a sign the threat of deflation that once loomed over the currency bloc has abated.
Investors may be looking for more clarity on Trump's legislative priorities and policy details before establishing longer-term investment strategies.
(END) Dow Jones Newswires
January 18, 2017 11:04 ET (16:04 GMT)
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