U.S. yields for government debt turned higher Tuesday morning, as a report on inflation data rose in June by the largest amount since 2008, leaving the increase in U.S. inflation over the past 12 months well over 5%. The rise highlights supply-chain bottlenecks and spiking demand in the economic recovery phase from COVID-19.

An auction of U.S. 30-year Treasurys also will be closely watched.

How Treasurys are performing

The 10-year Treasury note
TMUBMUSD10Y,
1.346%

yields 1.366%, 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,
1.974%

was at 1.997%, versus 1.993% a day ago.

The 2-year Treasury note
TMUBMUSD02Y,
0.232%

was yielding 0.229%, compared with 0.231%.

Fixed-income drivers

Treasury debt yields edged up Tuesday, amid growing evidence that inflation is picking up steam and may force the Federal Reserve to consider removing accommodation sooner than later.

The consumer-price index, or CPI, leapt 0.9% in June, the government said Tuesday, 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 jump in inflation comes after comments from New York Federal Reserve President John Williams on Monday, where he implied that the central bank might be reluctant to soon remove financial market accommodation known as QE or quantitative easing.

Williams said conditions in the labor market haven’t yet been sufficient to pare back the pace of the Fed’s QE stimulus program, which entails monthly purchases of $80 billion in Treasurys and $40 billion in mortgage-backed securities.

However, the president of the St. Louis Fed Jame Bullard said Tuesday 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.

Meanwhile, investors will watch at 1 p.m. ET how an auction of $24 billion of 30-year U.S. Treasurys fares.

What strategists and traders say

“For the time being, investors are faced with yet another strong inflation report and 10-year yields at 1.35% despite the Fed’s ongoing progress toward scaling back bond purchases,” wrote BMO Capital Markets analysts Ian Lyngen and Ben Jeffery in a research note.

“It’s this backdrop that has us wary of a more durable rethink of where US rates can (or have) peaked at this point in the cycle; which could trigger an even greater capitulation. If nothing else, the fact that the move to a lower yield range that saw 10-year yields dip below 1.25% wasn’t met by a wholesale rejection of the bid implies a degree of sustainability if nothing else,” the analysts wrote.

“Positions in the Treasury market remain short; albeit not as short as seen earlier in the year,” Lyngen and Jeffery write.

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