Treasuries Climb Well Off Worst Levels But Close Modestly Lower

Treasuries closed modestly lower on Tuesday, giving back ground after moving notably higher over the course of the previous session.

Bond prices regained ground after coming under pressure early in the session but remained in negative territory. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, inched up by 1.4 basis points to 1.438 percent.

The early pullback by treasuries came as traders looked ahead to the Federal Reserve's monetary policy announcement on Wednesday.

With inflation remaining at an elevated rate, the Fed is widely expected to accelerate its timetable for reducing bond purchases.

Many traders expect the Fed to begin raising interest rates shortly after bringing its asset purchase program to a halt.

Potentially adding to pressure on the Fed, the Labor Department released a report showing producer prices increased by more than expected in the month of November.

The report said the producer price index for final demand advanced by 0.8 percent in November after climbing by 0.6 percent in October. Economists had expected producer prices to rise by 0.5 percent.

With the stronger than expected monthly price growth, the annual rate of producer price growth accelerated to 9.6 percent in November from 8.8 percent in October.

The Labor Department said the year-over-year spike reflected the largest advance since 12-month data were first calculated in November 2010.

"The Fed has already pivoted to prioritizing inflation, so rather than causing any new inflation panic, this report is just another nail in the coffin for the "wait it out" mindset seen as recently as a month ago," said Will Compernolle, Senior Economist at FHN Financial.

He added, "Supply chain pressures should ease in the next few months as holiday shopping lets up and producers have more time to adjust capacity, but the impacts on producer prices and then to consumer prices will not be immediate.

Selling pressure waned over the course of the session, however, as treasuries were still seen as a safe haven amid lingering worries about the new Omicron variant of the coronavirus.

With the Fed announcement in focus, trading activity may be somewhat subdued in the lead up to the release of the statement Wednesday afternoon.

Traders are still likely to keep an eye on a slew of U.S. economic data, including reports on retail sales, import and export prices, and homebuilder confidence.

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