* Fed raises interest rates for second time this year
* Fed forecasts one more rate rise in 2017
* Yields lower on day as traders see weak inflation
(Updates with market response to Fed, inflation data)
By Sam Forgione
NEW YORK, June 14 Long-dated U.S. Treasury
yields tumbled to their lowest since early November on Wednesday
after surprisingly weak data on inflation and retail sales
overshadowed an interest rate hike by the Federal Reserve.
The U.S. central bank raised its benchmark overnight rate to
a range of 1.00 to 1.25 percent, its second quarter-point hike
this year. Fed policy makers also signaled they
were likely to raise rates once more this year, which helped
lift yields on two-year notes, the most sensitive to Fed rate
policy expectations, from their lows of the day.
But the Fed's cautious outline of its plan for unwinding its
$4.5 trillion bond portfolio, which it has used to keep
long-term interest rates low to boost economic activity, did
little to lift yields further out the yield curve. The Fed
initially plans to trim its holdings of Treasuries and mortgage
bonds by a combined $10 billion a month, seen as a very gradual
As a result, the Treasury yield curve flattened, with the
spread between 2- and 10-year yields narrowing to
less than 80 basis points, its tightest since early September.
The big moves in the day came early, however.
Government data on inflation and retail sales for May fell
well short of market expectations. The core rate of
inflation, which strips out food and energy costs, rose at just
1.7 percent year over year, the fourth straight monthly
deceleration and the slowest pace overall in two years.
Bond yields plunged by the most in a month following the
While the Fed later stood by its conviction that the recent
softening in inflation was not a long-term threat, long- and
medium-dated yields remained not far from their lowest levels
since November hit after the weak inflation data.
"The market remains highly skeptical that the Fed is going
to be able to deliver just based upon underlying data," said
Mark Cabana, head of U.S. short rates strategy at Bank of
America Merrill Lynch in New York.
U.S. 10-year yields were last at 2.127 percent
after touching 2.103 percent earlier, their lowest since Nov.
10. U.S. 30-year yields were last at 2.769 percent
after touching their lowest since Nov. 9 of 2.765 percent
U.S. two-yields were last at 1.335 percent, down
3 basis points on the day.
(Reporting by Sam Forgione; Writing by Dan Burns; Editing by
Diane Craft and James Dalgleish)