By Sam Goldfarb

U.S. government bonds continued their recent rally Wednesday, benefiting from anxiety over the presidential election as the Federal Reserve stayed on track to raise interest rates in December.

The Fed, as expected, left interest rates steady at the conclusion of a two-day policy meeting. But it sent new signals that it could raise rates next month, pointing to signs that inflation is rising and saying the case for raising rates "has continued to strengthen."

In late-afternoon trading, the yield on the benchmark 10-year Treasury note was 1.799%, compared with 1.822% Tuesday. The yield on the two-year note, whichis highly sensitive to changes in the Fed's policy outlook, was 0.821%, compared with 0.829% Tuesday.

Yields fall when bond prices rise.

The Fed's decision was "pretty much as expected," said Mary Ann Hurley, vice president of fixed income trading in Seattle at D.A. Davidson & Co. "We knew that they were going to punt the ball into the December meeting, which is what they did do."

Bond yields moved only a little higher after the Fed's statement, suggesting investors didn't gain much insight into the direction of monetary policy.

Yields, though, had dropped earlier in the day, as investors continued to shift money into haven debt amid signs of a tightening presidential race between the Democratic nominee Hillary Clinton and Republican nominee Donald Trump.

Although Mrs. Clinton was previously expected to win handily, polls have tightened recently, forcing investors to price in the possibility of a victory by Mr. Trump, who is widely viewed as the candidate more likely to bring uncertainty to government policies.

Stocks, which fell last month, have come under further pressure, while bond prices have climbed for three consecutive days after falling sharply last week.

Government bonds were hit by waves of selling in October in part because of improved global economic data, rising inflation expectations, concern about less bond buying by major central banks and discussion about increased spending from governments that would require more debt issuance.

The rationale behind higher yields seemed to be supported earlier this week, when China and the U.S. both reported encouraging manufacturing data. But uncertainty caused by the election is now "counteracting any bright spots that we're seeing in the economy," said Jody Lurie, director in the fixed-income strategy and research department at Janney Montgomery Scott LLC in Philadelphia.

Also providing a boost to bonds has been a decline in oil prices, which has weighed on stock prices and tempered the recent increase in inflation expectations, analysts said.

Investors are looking ahead to Friday's nonfarm payrolls report, which could further bolster the odds of a December rate rise if it shows continued strength in the labor market.

A private survey showed on Wednesday that businesses across the country added 147,000 workers in October, the smallest increase since May. However, the September total was raised to 202,000 from 154,000.

Fed-funds futures, which are used to speculate on central bank policy, showed Wednesday afternoon that investors and traders see a 72% chance of an increase by the conclusion of the Fed's December meeting, according to CME Group. The odds were 74% Tuesday.

COUPON ISSUE Price CHANGE YIELD CHANGE

3/4% 2-year 99 28/32 up 1/32 0.821% -0.8BPS

1% 3-year 100 3/32 up1/32 0.968% -1.1BPS

1 1/4% 5-year 99 30/32 up 4/32 1.261% -2.6BPS

1 5/8% 7-year 100 10/32 up 6/32 1.578% -2.8BPS

1 1/2% 10-year 97 11/32 up 7/32 1.799% -2.3BPS

2 1/4% 30-year 93 16/32 up 5/32 2.564% -0.7BPS

2-10-Yr Yield Spread: +97.8BPS Vs + 99.3BPS

Source: Tradeweb/WSJ Market Data Group

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

November 02, 2016 16:14 ET (20:14 GMT)

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