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US Treasury yields rose sharply on Thursday after a stronger-than-expected reading of inflation in June, which weighed on demand for long-term government auctioning.
What are the Treasurys doing?
The yield on 10-year treasury bills
TMUBMUSD10Y, -0.29%
up by 6.1 basis points, reaching 2.122%, its highest level in four weeks, while the 30-year bond yield
TMUBMUSD30Y, + 3.23%
up 7.2 basis points to 2.642%, its highest level since May 30th. The rate of 2-year notes
TMUBMUSD02Y, -0.60%
was up 2.7 basis points to 1.852%.
The gap between short-term yields and long-term yields, or "yield curve," has continued to widen since Wednesday, while expectations of a 25 to 50 basis point reduction the federal funds rate in July rose. The 2-year / 10-year gap is around 27 basis points, compared with 15 basis points in the early weeks.
What motivates the Treasurys?
The data on inflation stronger than expected have dampened the appetite for a $ 16 billion auction of 30-year treasury bonds, which are more sensitive to the corrosive impact of inflation as shorter term maturities. The sale of debt fell by 3 basis points, a sign of insufficient demand. The tail represents the gap between the highest yield sold by the Treasury at auction and the highest yield expected at the beginning of the auction – the "once issued" level.
The consumer price index rose 0.1% in June, while the main gauge, which excludes unstable prices for food and energy, rose 0.3%. Both measures exceeded the expectations of economists surveyed by MarketWatch.
However, market participants believe that inflation data should not prevent the Federal Reserve from proceeding with rate cuts, but this could weigh on the likelihood of a more aggressive half-point reduction percentage. Futures traders in the federal funds futures are now predicting an 18% probability of reducing rates by 50 basis points on July 31, compared to 30% the previous day, according to CME data.
Fed Chairman Jerome Powell told Senate lawmakers that the US central bank should defend its commitment to the symmetrical nature of its 2% inflation target. Investors said his congressional testimony this week suggested that the US central bank would soften its policy in July.
What do market players say?
"The Fed has been trying for some time to defend the inflation target through its communication, but it took Powell's dovish comments on centering down risks on the economy. and its decision to abandon the resumption of inflation this morning to finally force the yield curve to accentuate, "writes Thomas Simons, senior money market economist at Jefferies, who also describes the auction results as "shocking".
"The CPI data will not change Powell's mind," Frances Donald, chief economist at Manulife Asset Management, told MarketWatch. It expects rate cuts of 25 basis points each in July and September.
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