Treasury yields end week lower after Fed decision, higher inflation

Jerome Powell, nominee to be chairman of the Federal Reserve Board of Governors, testifies during his confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, DC, November 28, 2017.
Saul Loeb | AFP | Getty Images
Jerome Powell, nominee to be chairman of the Federal Reserve Board of Governors, testifies during his confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, DC, November 28, 2017.

[The bond market was closed Monday in the U.S. due to the Veterans Day holiday]

U.S. government debt yields fell on Friday following the Federal Reserve's decision to stand by its plans for further rate hikes and signs of inflation among producers.

The yield on the 10-year Treasury note was seen trading lower at around 3.187 percent, while the yield on the 30-year Treasury bond dipped to 3.387 percent. While the 2-year yield inched lower Friday, the rate is up about 6 basis points this week; the 10-year is largely unchanged across the last five sessions. Bond yields move inversely to prices.

The 2-year rate hit its highest level since June 2008 on Thursday following the latest monetary policy decision from the Fed. The U.S. central bank left rates unchanged as expected, but maintained its plans to hike interest rates, saying it saw "further gradual increases" ahead. The bank did, however, note that business investment had "moderated from its rapid pace earlier in the year."

"The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term," FOMC members said in statement, using the exact language they'd used prior.

Fed officials, who attempt to keep unemployment low and inflation moderate, have gradually increased interest rates under Fed Chair Jerome Powell as they try to prevent the U.S. economy from overheating.

"I think the Fed has been very consistent in saying they will keep moving rates higher at a slow pace dependent on data," Jim Caron, bond manager at Morgan Stanley Investment Management, said in an emailed statement. "If the unemployment rate keeps falling and wages keep rising, then I would expect the Fed to hike above the neutral policy rate level of 3 percent."

Inflation has been drifting higher in recent months, with a measure of U.S. business prices rising steadily in October.

The U.S. producer price index posted its largest monthly gain since September 2012 during the month of October, the Labor Department said Friday. Producer prices rose 0.6 percent during the month; headline PPI was expected to match last month's increase and show an increase of 0.2 percent.

Excluding the volatile food and energy components, prices rose 0.5 percent in October from the prior month. Barring food, energy and trade services, prices grew 0.2 percent last month.

"Inflation has been surprising to the upside but we believe this is later cycle behavior and has somewhat to do with tariffs between the U.S. and China," Caron added. "We still see inflation peaking in 2019 at core personal consumption expenditure levels around 2.2 percent and gross domestic product growth slowing to about 2.6 percent."

The PCE price index excluding the volatile food and energy components, the Fed's preferred inflation gauge, rose 0.2 percent in September after being flat in August.

That left the year-on-year increase in the so-called core PCE price index at 2.0 percent for a fifth straight month. The metric rose above the central bank's 2 percent inflation target in March for the first time since April 2012.

— CNBC's Ryan Browne contributed reporting.