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Bond Report: 10-year Treasury yield slips to around three-week low despite U.S. March inflation surge

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Treasury yields slipped Tuesday after bond investors looked past an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years.

What are Treasurys doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.620%

fell 5.3 basis points to 1.622%, its lowest since March 25, while the 2-year note
TMUBMUSD02Y,
0.156%

slid 1.2 basis points to 0.159%. The 30-year bond yield
TMUBMUSD30Y,
2.300%

declined 3.9 basis points to 2.306%.

What’s driving Treasurys?

The U.S. consumer price index rose 0.6% in March, while the core gauge that strips out for energy and food prices came in at an 0.3% increase. The annual rate of inflation climbed to 2.6% from 1.7% in the prior month, marking the highest level since the fall of 2018.

Long-dated Treasurys have taken a beating so far this year in anticipation of rising inflation, unleashed by the reopening of the U.S. economy in the wake of the coronavirus pandemic.

See: Here’s why the bond market shrugged off a surge in U.S. inflation

But yields didn’t surge on Tuesday following the publication of the inflation data as analysts had been expecting a surge in price levels already and the rise in annual inflation partly reflected the recovery from the weak readings last March when the pandemic first impacted the economy.

Reflecting the recent bullishness among investors, an auction for $24 billion of 30-year government bonds “stopped through” by 1.6 basis points, a sign of strong demand. A stop-through indicates when the highest yield the Treasury sold in the auction falls below the highest yield expected when the auction began – the “when issued” level.

Some members of the Federal Reserve’s rate-setting committee spoke on Tuesday, largely adhering to the central bank’s previous messaging that the rise in inflation this year would be transitory.

Read: The Federal Reserve sees inflation moving up towards its 2% annual target but doesn’t see runaway price pressure

What did market participants say?

“Markets seemed to be anticipating an upside surprise,” said said Erik Nelson, a macro strategist at Wells Fargo.

“The noise from inflation base effects may also be leading some market participants to simply look through today’s print,” said Nelson.

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