U.S. government bond prices firmed Wednesday as minutes from the Federal Reserve’s latest meeting showed officials debated whether tax cuts would require them to alter their plan for rate increases in 2018.
The yield on the benchmark 10-year U.S. Treasury note settled at 2.445%, compared with 2.465% Tuesday.
Yields, which fall as bond prices rise, pared overnight declines after data showed the U.S. factory sector gained momentum in December.
The Institute for Supply Management said Wednesday that a measure of sales at factories rose in December to the highest level since early 2004—the latest sign of strength among U.S. manufacturers. Upbeat economic data tends to weaken demand for assets that investors see as havens, including Treasurys.
Later Wednesday, the yield on the 10-year note briefly jumped after minutes from the Fed’s December policy meeting showed officials debated whether tax cuts passed by Congress would require them to raise short-term interest rates faster in 2018.
Officials discussed the possibility “that inflation pressures could build unduly. perhaps owing to fiscal stimulus or accommodative financial market conditions,” the minutes said. Fed officials have penciled in three rate increases in 2018 and two in 2019.
A pickup in growth and inflation spurred by tax cuts could prompt the Fed to raise rates faster than expected, potentially putting pressure on bond prices—although some investors and analysts have expressed skepticism that the tax package will have a major effect on inflation.
Tepid inflation had kept pressure on longer-term Treasury bond yields throughout 2017, with the yield on the 10-year note ending the year at 2.409%, slightly below where it settled at the end of 2016.
“The scenario is pretty much the same: if inflation becomes present, then long rates will likely rise. If not, then what else is going to bring out the sellers?” said Kevin Giddis, head of fixed income capital markets at Raymond James.
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