U.S. government debt yields fell the most in weeks on Thursday, reversing course after a reading on inflation came in weaker than expected, helping to support buying of Treasurys and pushing yields sharply lower.
The producer-price index was unchanged in July, the Labor Department reported, with the reading coming in below average analysts’ estimates surveyed by MarketWatch for a 0.2% gain.
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.64% lost 3.4 basis points to 2.935%, marking its largest one-session yield decline since July 3, based on values around 3 p.m. Eastern, according to Dow Jones Market Data.
The two-year note yield /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -2.37% meanwhile, gave up 2 basis point to 2.65%, notching its biggest daily yield drop also since July 3.
The 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.04% slipped by 3.7 basis points to 3.081%, representing its sharpest yield decline in a day since June 27.
Bond prices and yields move inversely.
Rising inflation is anathema to bonds because that it gcan erode a bond’s fixed value and compel the Federal Reserve to dial up its rate-hike plans. Muted inflation, conversely, can stoke appetite for bond purchases as investors bet that inflation will remain subdued for an extended period. The Fed is still likely to increase interest rates twice before the end of 2018, beginning as early as September.
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said the PPI report “takes the edge off any expectations for a strong CPI [consumer-price index report] tomorrow,” which could push yields higher.
The CPI report is expected to show a monthly rise of 0.2%.
Lyngen said, however, that geopolitical turmoil partly stoked by worries about trade between China and the U.S. and a rising U.S. dollar have supported Treasury buying, keeping yield moves confined.
Indeed, bonds have traded in a relatively narrow band in recent weeks as stock markets in the U.S. have remained relatively resilient despite trade tensions between Washington and Beijing running hot in the background. On Wednesday, China warned that duties imposed by President Donald Trump’s administration on some $50 billion of Chinese imports set to be enacted on Aug. 23, would be matched .
On top of that, the U.S. instituted new sanctions on Russia over a nerve-agent attack, which knocked the Russian ruble /zigman2/quotes/210561862/realtime/sampled USDRUB +0.2136% and Moscow markets /zigman2/quotes/200464876/composite RSX -1.59% /zigman2/quotes/206979425/composite ERUS -2.33% lower.
During a Thursday interview with reporters, Chicago Federal Reserve President Charles Evans implied that the central bank still expects inflation to hit the Fed’s annual target of 2% and possibly overshoot that level. He said policy makers aren’t fretting surpassing that target, describing it as “nothing to worry about.” Evans isn’t currently a voting member of the policy-setting Federal Open Market Committee.
Also in focus for fixed-income investors was the Treasury Department’s auction of $18 billion in 30-year bonds, which drew weaker appetite than had been expected, according to sources. Bond investors absorbed an auction of $26 billion in 10-year notes Wednesday, which saw strong bidding, according to sources. The sales were part of some $78 billion in government debt that was set to be sold this week.
In other economic reports, initial jobless claims fell more than expected in the latest week.