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Bond Report: 10-year Treasury yield slides to fresh 3-month low as pace of inflation returns to 2008 levels

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U.S. government bond yields fell, adding to their decline to lows not seen since March or February, after a report on May inflation showed that the pace of inflation rose to a 13-year high of 5%, as the economy recovers from the COVID pandemic.

Fixed-income investors also watched a European Central Bank policy update.

Read: U.S. Treasury yields fall despite higher inflation: Here are some reasons why

How Treasurys are trading
  • The 10-year Treasury note yield
    TMUBMUSD10Y,
    1.441%

    was at 1.458%, down 3.4 basis points, from 1.489% on Wednesday, based on 3 p.m. Eastern Time levels, which marks the lowest yield for the benchmark since March 2, according to Dow Jones Market Data. Yields fall as prices rise, and vice versa.
  • The 30-year Treasury bond
    TMUBMUSD30Y,
    2.128%

    was yielding 2.153%, compared with 2.168% a day ago, which was the long bond’s lowest yield since Feb. 19.
  • The 2-year Treasury note rate
    TMUBMUSD02Y,
    0.152%

    was at 0.151%, versus 0.155% on Wednesday.
What’s driving the fixed-income market?

Fixed-income investors, lately, have traded as if concerns about runaway inflation remain on the back burner, and that growing pricing pressures will be temporary as the economy continues to recover from the worst pandemic in a century.

Yields briefly edged higher, after the U.S. consumer-price index report indicated that the rate of inflation over the past year escalated to 5% from 4.2% a month ago, representing the highest level since 2008, when the cost of oil hit a record $150 a barrel. Before that, the last time inflation was as high was in 1991. Those gains were reversed later in the session.

Members of the Federal Reserve have insisted that price pressures will wane once the U.S. and global economies regain a more normal footing.

The CPI jumped 0.6% in May to mark the fourth large gain in a row, the government said Thursday. Soaring used-car prices accounted for one-third of the overall monthly increase. Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% increase in the CPI.

Last month’s hotter-than-expected jump in the April CPI briefly rattled markets, while raising the possibility that the Federal Reserve might move sooner than anticipated to slow its $120 billion a month asset purchases, a program that helped ease tensions in the market in March 2020 during the worst of the pandemic.

In Europe, the ECB on Thursday offered few surprises, keeping interest rates unchanged and leaving the size of its asset-purchase programs unchanged, as expected. The ECB said it expected to continue to buy assets under its pandemic emergency purchase program, or PEPP, at a “significantly higher” pace than seen in the early months of this year.

Separately, a 30-year auction of $24 billion yielded 2.172%, tailing 1 basis point, an indication of soft demand but also seen as relatively strong, given that the long bonds yield stands at 16-week low. The tail is the gap between the highest yield the Treasury sold in the auction and the highest yield expected when the auction began—the “when issued” level.

What strategists are saying

“Today’s data on consumer prices appears to be an extension of what we witnessed back in April with the core consumer price index running hotter than expected,” wrote Charlie Ripley, senior investment strategist for Allianz Investment Management.

“Within the data, strong contribution continues to come from sectors that are rebounding quickly with pandemic restrictions easing. Additionally, it is still evident that supply chain issues are taking a toll on some sectors with used car prices increasing 7.3% over the month,” wrote Ripley.

“Figures like today’s CPI will certainly be raising eyebrows at the Fed, but the bottom line is they will likely need additional evidence to determine whether upward inflation pressures will be more persistent,” he wrote.

“We’ve noted many times that long duration auctions require concessions in order to go well,” wrote Jefferies economists Thomas Simons and Aneta Markowska, in a note, referring to the 30-year auction.

“Today’s auction didn’t get much in that department as the WI barely backed up after the higher than expected CPI data this morning,” the economists wrote.

Futures Movers: Oil ends higher, with U.S. prices back above $70 a barrel

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