By Sam Goldfarb 

U.S. government bond prices fell Thursday, pushing the yield on the benchmark 10-year Treasury note to a seven-year high, after the Federal Reserve held short-term interest rates steady while presenting a rosy picture of the U.S. economy.

The 10-year yield, which helps set borrowing costs for individuals and companies around the world, settled at 3.232%, compared with 3.215% Wednesday. That beat out its previous 2018 closing high of 3.227% set on Oct. 5 and marked its highest settlement since May 2011.

Yields, which rise when bond prices fall, climbed heading into the announcement of the Fed's interest-rate decision and extended gains afterward, with analysts saying the central bank's policy statement largely met expectations.

The Fed's statement listed a range of positive economic signs. While it didn't include any new language that would indicate heightened concerns about rising inflation, it also made no mention of recent volatility in financial markets -- something investors and analysts said would have sent a dovish signal to traders.

The Fed has been one major factor pushing yields higher recently. While some have wondered whether the recent declines in riskier assets could cause the central bank to at least consider slowing its pace of interest-rate increases, policy makers have largely stuck to a disciplined message, strongly implying they'll raise rates for a fourth time this year in December and then keep on tightening monetary policy next year.

Federal-funds futures, used by investors to bet on the direction of interest rates, showed Thursday a 78% chance that the central bank will raise its benchmark fed-funds rate by at least 0.25 percentage point to 2.25%-2.50% at its December meeting. They also showed a 34% chance the Fed will raise the rate to at least 3% by the end of next year, up from 7% at the end of August.

Meanwhile, the U.S. economy's robust performance in recent months has itself sapped demand for Treasurys. There is now little doubt the economy is doing well, analysts said. The question is whether it is doing too well, with investors increasingly nervous that there could be an upswing in inflation or a turn to a more rapid pace of rate increases by Fed officials intent on mitigating the inflation threat.

A big reason why U.S. government bonds, and then U.S. stocks, declined in recent months was rising uncertainty about inflation expectations and the Fed's potential response, said Karissa McDonough, a fixed-income strategist at People's United Wealth Management.

The outcome of the U.S. midterm elections may have curbed some of that uncertainty. Some analysts now foresee slimmer odds that Congress could stoke the economy and further increase the budget deficit through additional tax cuts because Democrats will now control one half of Congress. Other analysts, though, have noted the potential for a bipartisan infrastructure spending bill that could have a similar effect. It is also possible that inflation could jump on its own, with recent data showing unemployment at a 49-year low and U.S. workers earning their biggest pay raises in nearly a decade.

Ultimately, an aggressive policy stance from Fed officials could put downward, rather than upward, pressure on long-term yields, some analysts caution. In early October Fed Chairman Jerome Powell caught the attention of bond traders when he said in an interview that the central bank "may go past neutral," or raise rates past the point where they are neither accommodative nor restrictive to the economy.

His comments appeared offhand and not particularly forceful, but any repeat of that message that seems more deliberate could throw markets into another spell of volatility, said Priya Misra, head of global rates strategy TD Securities in New York.

"Risk assets will not like that at all" while the gap between short and longer-term Treasury yields could narrow, she said.

At the same time, Treasury yields could also rise simply because supply of the debt outpaces demand.

In one potentially ominous sign, an auction of $19 billion of 30-year bonds met the weakest demand since 2009 on Wednesday, resulting in an immediate jump in longer-term yields.

Recent data has shown that Asian investors have been buying fewer U.S. government bonds, even as the Treasury Department prepares to sell $1.3 trillion of new debt in the new fiscal year to fund the government's expanding budget deficit.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

November 08, 2018 16:28 ET (21:28 GMT)