Treasury yields remained higher Thursday afternoon after a $27 billion auction of 30-year bonds and U.S. producer price index data offered little evidence that a recent wave of inflation is about to crest.
What yields are doing
The 10-year Treasury note
yields 1.377%, compared with 1.339% at 3 p.m. Eastern Time on Wednesday. Yields for debt move in the opposite direction to prices.
The 30-year Treasury bond
was yielding 2.027%, versus 2.004% a day ago.
The 2-year Treasury note
yields 0.225%, little changed from its rate on Wednesday.
What’s driving the market?
Treasury’s $27 billion auction of 30-year bonds was “fair”, according to BMO Capital Markets strategist Ben Jeffery, but saw less demand than Wednesday’s issuance. The sale came a day after a $41 billion auction in 10-year Treasury notes produced a bid-to-cover ratio that was the highest since May 2020, reflecting heady appetite.
Meanwhile, the producer-price index, or PPI, a measure of the prices businesses receive for their goods and services, rose for the sixth month in a row, countering a report on consumer prices earlier this week that seemed to suggest that pricing pressures may be moderating.
PPI jumped 1% last month, the government said Thursday, hotter than the 0.6% increase that economists polled by The Wall Street Journal had forecast. PPI over the past 12 months moved up to 7.8% for July from 7.3% in the prior month.
Inflation running hot, in theory, should push up yields for longer dated bonds because rising pricing pressures can erode government debts fixed value.
Many expect the wave of inflation to recede once the economy returns to normal, though it’s far from clear how long it will take. Some economists also wonder if the rate of inflation will end up higher than the Federal Reserve’s 2% target for some time.
The Fed is seen as possibly hinting at the topic of tapering its $120 billion in monthly purchases of Treasurys and mortgage-backed securities as soon as its three-day Jackson Hole Economic Symposium, which starts on Aug. 26.
So far, however, Treasury investors have received mixed messages from Federal Reserve officials. Kansas City Federal Reserve President Esther George says the time has come to end the central bank’s bond-buying program — a similar tone taken by Dallas Fed President Robert Kaplan in an interview with CNBC. By contrast, Chicago Fed President Charles Evans said late Tuesday that he wasn’t yet ready to support such an announcement.
Meanwhile, the Labor Department reported today that weekly initial jobless benefit claims declined for the period ended Aug. 7, with those seeking unemployment benefits at 375,000, matching average estimates from economists surveyed by Dow Jones.
What analysts are saying
“After yesterday’s downside surprise on July CPI inflation, today’s PPI data were firmer than expected,” JPMorgan Chase & Co.’s Jesse Edgerton wrote in a note. Ultimately, “we suspect that the most rapid monthly price increases are now behind us, as used vehicle prices are starting to cool and price rebounds in some COVID-affected sectors like lodging may be complete.”
“The current market consensus is a late Q4 Fed tapering announcement (Nomura’s house view is December, with risk of November), which seems reasonable,” wrote Nomura research analysts in a research note dated Thursday. However, they warned that the Fed could surprise the market by announcing tapering earlier and that the market is ill prepared for a September tapering announcement. “It is conceivable that Fed Chair Jay Powell will start to prepare the markets for tapering at his Jackson Hole speech, followed by a formal taper announcement at the September [Federal Open Market Committee] meeting,” the analysts wrote.