U.S. yields for government debt turned higher Tuesday afternoon, with yields levitating after holding lower for much of the session, following a report for June that showed that consumer prices rose at the largest annual rate since 2008. The rise in inflation highlights supply-chain bottlenecks and spiking demand in the economic recovery phase from COVID-19.

Meanwhile, an auction of U.S. 30-year Treasurys produced poor results.

How Treasurys are performing

The 10-year Treasury note
TMUBMUSD10Y,
1.424%

was yielding 1.415%, compared with 1.362% at 3 p.m. Eastern Time on Monday. Yields for debt fall as prices rise.

The 30-year Treasury bond rate
TMUBMUSD30Y,
2.049%

was at 2.037%, versus 1.993% a day ago.

The 2-year Treasury note
TMUBMUSD02Y,
0.268%

was yielding 0.255%, compared with 0.231%.

Treasury yields rose for a third straight day with the 2-year hitting its highest rate since July 1, and 10 and 30-year debt touching their highest yields since July 2, according to figures compiled by Dow Jones Market Data.

Fixed-income drivers

Treasury debt yields gained some buoyancy Tuesday afternoon, pushing rates back up to levels not seen the beginning of July, after holding lower in the early part of the session, despite a report that highlighted growing evidence that inflation is picking, which could force the Federal Reserve to consider removing accommodation sooner than later.

Tuesday’s yield rise, at least partly, was attributed to a lackluster bond auction. A $24 billion sale of 30-year paper was awarded at 2%, above the 1.976% when-issued yield, and had a bid-cover ratio that Jefferies LLC described as the weakest since February. Treasury auctions can influence trading of outstanding government debt.

The afternoon auction came after a Labor Department report showed that the consumer-price index, or CPI, leapt 0.9% in June, as the cost of used cars accounted for more than one-third of the increase.

Economists polled by The Wall Street Journal had forecast a 0.5% increase.

The rate of inflation in the 12 months ended in June climbed to 5.4% from 5% in the prior month, marking the steepest such rise since 2008. Another closely watched measure of inflation that excludes volatile food and energy prices also rose 0.9% in June. The 12-month rate increased to 4.5% from 3.8% and stood at a 29-year high.

The inflation report was followed by comments from the Federal Reserve Bank of San Francisco President Mary Daly. She told CNBC that a tapering of bond purchases could begin late this year or early next, and that she’s convinced the recent spate of inflation will prove to be short-lived.

Meanwhile, her colleague at the St. Louis Fed, James Bullard, said that the Federal Reserve should start reducing the stimulus it provides to the U.S. economy, though he added the reduction didn’t need to start immediately. “I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures,” he told the The Wall Street Journal in an interview published Tuesday.

What strategists and traders say

“Tuesday’s CPI data was meaningful, but not definitive,” said Thomas Graff, a portfolio manager at Brown Advisory, which oversees $125 billion.

“The year-over-year headline number, at 5.4%, is eye-popping, but right now the sequential month-over-month number, at +0.9%, is more important and indicating that supply pressures will continue. The Fed can wait out supply issues for a while, but at some point that’s going to influence longer-term inflation expectations, and policy makers won’t be able to ignore them anymore,” the portfolio manager said in a phone interview.

“Each time we get a sequentially high inflation print, we are one step closer to the time when the Fed is probably going to tighten,” he said.

Meanwhile, portfolio manager Scott Ruesterholz of Insight Investment, which manages more than $1 trillion, says it could be more than a year before the 10-year Treasury yield hits either 1% or 2%–given the surfeit of cash created by the Fed that’s still “looking to be invested.” He expects the rate to instead trend between 1.25% and 1.75%.

This “wall of cash,” also created by other central banks, is suppressing how high yields can go, Ruesterholz wrote in emailed comments.

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