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Bond Report: 10 and 30-year Treasury yields rise, post biggest weekly gain since at least March after inflation report

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U.S. Treasury yields rose on Friday and ended higher for the week, with long-dated debt registering their steepest weekly climb in months, after economic data showed an upward march in the cost of living, based on the Federal Reserve’s preferred inflation gauge, the personal-​consumption expenditures, or PCE.

How Treasurys are performing?
  • The 10-year Treasury note yields
    TMUBMUSD10Y,
    1.527%

    closed around 1.535%, versus 1.486% at 3 p.m. Eastern Time on Thursday.
  • The 30-year Treasury bond rate
    TMUBMUSD30Y,
    2.150%

    was at 2.169%, up 7.4 basis points, compared with 2.095% a day ago.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.277%

    was yielding 0.270%, from 0.266% on Thursday.

Weekly stats

For the week, the 10-year Treasury note picked up 8.6 basis points and marked its biggest weekly yield gain since March 19; the 30-year Treasury rose 14.2 basis points for its steepest weekly gain since Jan. 8, according to Dow Jones Market Data.

The 2-year Treasury note rate climbed 1.4 basis points on the week, marking its fourth consecutive yield climb, pushing the note to its highest rate since April 7, 2020.

Fixed-income drivers

Yields marched higher for the week but at an orderly pace, which perhaps helped to pave the way for a rally in U.S. equities.

The U.S. core PCE price index, the Federal Reserve’s favored inflation gauge that strips out energy and food rose 3.4% in the May year, the biggest increase in since 1992. The overall PCE price index rose 3.9% for the year, the biggest increase since August 2008. 

However, the month-to- month increase for core inflation of 0.5% in May and 0.4% for the headline index were less than forecast and followed bigger monthly readings for April.

Read: Consumers are feeling the pinch from higher inflation and they don’t like it

Also: Why aren’t Americans happier about the economy? They are paying higher prices for almost everything

The Fed has said that it views PCE as its preferred metric because it is believed to reflect changes in prices that the Labor Department’s consumer-price index may not. The PCE puts more weight on medical expenses and tracks both direct and indirect costs borne by consumers.

A measure of consumer income was down 2% in May, while spending was flat.

The report comes amid a worry about surging inflation, but comments from Federal Reserve Chairman Jerome Powell earlier this week may have injected some calm in markets. However, the trajectory for rates is expected to eventually be higher.

The PCE data comes after the consumer price index (CPI) for May earliershowed that the cost of living surged, driving the pace of inflation to a 13-year high of 5%, reflecting a broad increase in prices confronting Americans as the economy fully reopens. 

Some strategists argue that while the Fed insists inflation will be short-lived, the next key economic report to watch will be next week’s monthly employment figures.

On Friday, Federal Reserve President of Minneapolis Neel Kashkari said he expects recent high inflation readings not to last, and labor shortages to resolve themselves by the fall, in a virtual event hosted by the Minnesota Council of Nonprofits and the Minnesota Council of Foundations. 

Later in the session, Boston Fed President Eric Rosengren said that the economy may achieve the central bank’s self-imposed economic requirements for lifting interest rates, currently at a range between 0% and 0.25%, as early as late 2022, and tapering asset purchases that are running at $120 billion a month.

“I think its quite likely that the ‘substantial further progress’ criteria, at least in my own personal view, will likely be met prior to the beginning of next year,” Rosengren said, in an interview with Yahoo Finance on Friday.

Rosengren’s comments are in line with Fed officials including St. Louis Fed President James Bullard, and Atlanta Fed President Raphael Bostic, who said that the Fed could meet substantial progress in three or four months, if the labor market improves.

Read: Inflation is surging. How high will it go? Check out MarketWatch’s new tracker.

Some selling pressure for long-dated Treasurys also came as the Dow Jones Industrial Average
DJIA,
+0.69%
,
the S&P 500 index
SPX,
+0.33%

and the Nasdaq Composite Index
COMP,
-0.06%

closed with strong weekly gains.

Investors also are weighing the prospect of a sizable infrastructure spending bill after President Joe Biden announced that he and a bipartisan group of lawmakers had a deal on a $1 trillion infrastructure package.

Read:Infrastructure and the markets—here’s what the $1 trillion means

In other data, the University of Michigan’s consumer-sentiment index reading for June U.S. slipped in the second half of June, remaining at subdued levels. The reading was 85.5 in June, down from the mid-month flash estimate of 86.4 but above the 82.9 reading registered in May. Economists had expected the gauge to tick up to 86.5 from a reading of 86.4 in May.

What strategists are saying

“This week’s Fedspeak confirmed what we saw in the dots: the [Federal Open Market Committee] is very divided on the economic outlook, with some expecting solid growth momentum and inflationary pressures well into 2022, while others fear a return of disinflation next year as growth slows and transitory price pressure dissipate,” wrote Jefferies LLC economists Aneta Markowska and Thomas Simons, in a Friday research report.

“The same debate is playing out in the Treasury market which has been locked in a standoff between inflation bulls and bears for the past three months,” the Jefferies economists wrote.

“We do continue to expect that the “taper sooner” path that we have embarked upon here will likely put a lid on how much further inflation breakevens go from here and thus expect material further moves higher in rates will likely be led by higher real yields,” Jefferies wrote. 

“In the week ahead, the calendar would suggest that the only thing of relevance is the June employment report and we see little reason to argue with this logic,” wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery in a daily note.

“The Fed has effectively pivoted and while there are ramifications for the trading dynamics in the US rates market for the coming months, the more immediate skew is toward a period of consolidation—all else being equal,” the BMO analysts wrote.

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