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U.S. Government Bonds Reverse Gains After Yellen Remarks

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08/26/2016 | 07:28pm CEST
By Chelsey Dulaney 

U.S. government bonds reversed earlier gains Friday after Federal Reserve Chairwoman Janet Yellen signaled that U.S. interest-rates are likely to rise soon.

In recent trading, the yield on the benchmark 10-year note was 1.592%, according to Tradeweb, compared with 1.576% on Thursday and 1.561% before the speech. Yields rise when bond prices fall.

In remarks prepared for the annual economic symposium in Jackson Hole, Wyo., Ms. Yellen signaled growing conviction that the central bank will raise short-term interest rates soon. Ms. Yellen's comments echoed upbeat speeches from Fed officials in recent weeks indicating that the U.S. is strong despite recent weak economic growth and productivity readings.

Federal-funds futures, which are used to place bets on central-bank policy, showed that investors now see a 30% chance of rate increase at the Fed's September meeting, up from 21% Thursday, according to CME Group.

The odds of a December rate increase have risen to 60% from 52% the prior day, according to CME Group.

Ms. Yellen indicated that a near-term decision is dependent on upcoming data remaining strong, including next Friday's U.S. jobs report.

"The market is acknowledging the fact that the Fed really wants to hike, " said Ian Lyngen, senior government-bond strategist at CRT Capital.

The yield on the two-year Treasury note, highly sensitive to the Federal Reserve policy outlook, was at 0.825%, according to Tradeweb, compared with 0.786% Thursday.

Trading in the Treasury market was volatile after the speech, and analysts noted that thin volume is likely exaggerating moves. Treasury yields had initially fallen after some investors saw Ms. Yellen's comments as an indication that U.S. interest rates are likely to remain lower in the long term.

"She offset a possible hawkish near-term rate hike with a more palatable long-term outlook," said Ward McCarthy, a managing director at Jefferies. "What Janet Yellen has laid out is an environment in which rates are going to stay lower for longer.".

Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com

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