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Bond Report: Ten- and 30-year Treasury yields rise to highest in three weeks amid signs of cooling inflation

Ten- and 30-year Treasury yields rose on Thursday with investors expressing concern that the market may be too optimistic in betting the Federal Reserve will ease the pace of interest rate rises despite signs of easing U.S. inflation.

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
3.218%

rose 1.3 basis points to 3.227% from 3.214% as of Wednesday afternoon.

The yield on the 10-year Treasury
TMUBMUSD10Y,
2.890%

advanced 10.6 basis points to 2.886% after factoring in new issue levels. That’s the highest level since July 21, based on 3 p.m. levels, according to Dow Jones Market Data.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.182%

rose 13.2 basis points to 3.173% from Wednesday’s level of 3.041%. That’s the highest since July 19.

What drove markets

Data showed that the U.S. producer price index fell 0.5% in July, the Labor Department said Thursday. That’s down from a 1.0% jump in June. Meanwhile, the wholesale cost of goods fell 1.8 % last month, the largest decline since the 2020 pandemic recession.

The report was the latest sign of easing inflation, following Wednesday’s softer-than-expected consumer price index report, which had traders weighing whether inflation has peaked and if the Federal Reserve might cool its hawkish rhetoric. The annual headline inflation rate from the CPI index for July came in at 8.5%, down from 9.1% in June and below the 8.7% predicted by economists.

“Peak inflation is likely here, but it will be sticky,” said Scott Ruesterholz, a portfolio manager at Insight Investment, which manages $1.1 trillion in assets. “We believe the worst of energy and supply chain inflation is behind us. However, the persistence of sticky categories will likely help keep inflation in the 5.5% to 6% range by the end of the year, mirroring trends across the globe.”

Read: Financial market’s best inflation traders missed the downside surprises. Now they’re lowering 2022 expectations.

However, Tom Porcelli, chief U.S. economist at RBC Capital Markets, was a bit more hopeful that Wednesday’s CPI report meant the Fed may be able to restrict its September interest rate rise to 50 basis points “and then finish the cycle with a 25 in December.”

“What does all of this mean for the Fed? They will tell you they still have a lot of work to do, and the job is not even close to done etc etc. We get it. They have to say that right now. They cannot risk a notable easing in financial conditions. But there is no doubt this report came as a massive source of relief,” Porcelli wrote in a note.

Markets are pricing in a 59.5% probability that the Fed will raise interest rates by another 50 basis points to a range between 2.75% and 3% at its Sept. 20-21 meeting. The central bank is mostly expected to lift borrowing costs to at least a range of 3.5% to 3.75% by March, according to fed funds futures traders.

In other U.S. data on Thursday, initial jobless benefit claims rose 14,000 to 262,000 in the week ended Aug. 6.  

Treasury’s $21 billion auction of 30-year bonds produced a “near-record low dealer takedown,” according to economists at Jefferies.

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