Bond Report: 10-year Treasury yield holds near 3-month low, below 1.50%

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Yields for U.S. government debt on Friday were drifting lower again and are near levels not seen since early March, as fixed-income investors see recent inflation data supporting the thesis that rising prices will prove a temporary phenomenon.

A number of other factors also are contributing to anchoring yields lower, including appetite by yield-hungry banks and money market funds, as well as short-covering by traders who expected yields to rise with inflation, analysts said.

How Treasurys are performing
  • 10-year Treasury yields

    were at 1.463%, compared with 1.458% on Thursday based on rates at 3 p.m. Eastern Time. Treasury yields fall as prices rise.

  • The 30-year Treasury
    known as the long bond, was at 2.150%, versus 2.153% a day ago.

  • The 2-year Treasury note

    was yielding 0.149%, off 0.2 basis point on Thursday.

On Thursday, the 10-year Treasury hit its lowest yield since March 2, while the long bond held at its lows not seen since Feb. 19, according to Dow Jones Market Data.

For the week, the 10-year is down 9.6 basis points, the 30-year has shed 8.9 basis points, while the 2-year note was virtually unchanged, on a weekly basis.

What the debt market sees as key drivers

Fixed-income markets have shaken off U.S. consumer-price data published Thursday that showed that inflation over the past year escalated to a 13-year high of 5% from 4.2% in the prior month. That put it at the highest level since 2008, when the cost of oil hit a record $150 a barrel. Before that, the last time inflation was as high was in 1991.

A number of analysts said they are betting that the recent data on inflation suggests that pricing pressures won’t be longstanding.

Economists have pointed to so-called base effects as a big contributor to much of the elevated inflation, meaning months of falling inflation early in the pandemic last year were phased out from yearly measures as time passed, leading to mechanically higher price levels.

Meanwhile, the recovery in payrolls, as gauged by the Labor Department’s May report earlier this month, hasn’t instilled confidence that the jobs market is matching the rise in inflation, implying that the recovery may take longer to normalize.

In a Tuesday report, job openings soared to 9.3 million in April from a revised 8.3 million in the prior month, even as the U.S. economy added a comparatively sluggish 837,000 new jobs in May and April, combined.

Another factor that may also be adding to the fall in yields is increased appetite for Treasurys among banks and money-market funds and fading expectations that the Biden administration will be able to quickly push forward its proposed large infrastructure spending package.

Investor positioning also has been blamed for the yield slump as some traders had been betting that yields would steepen in the wake of the hot CPI inflation report.

Markets may gain more clarity next week when the Federal Reserve’s rate-setting Federal Open Market Committee convenes its two-day policy meeting starting June 15. The European Central Bank on Thursday kept in place its monetary policy and communicated the view that inflation will be transitory.

What analysts and traders say

“Record increases in CPI for a second straight month were driven by transportation costs. That’s not the only price increase, but monthly changes would be a lot lower without the impact of used vehicles soaring above a decade-long trend,” wrote Jim Vogel, executive v.p. president at FHN Financial.  

“Bond investors apparently are willing to track CPI-ex autos in the same way they adjust autos from retail sales. This is not the best way to do it, but it’s understandable in the moment,” the analyst said.

“Overnight bond trading did not rebel against Thursday’s move. The domestic session opened with 10s around 1.43% and 5s at .72%.”

“Trading volume was average, and there is no market-moving data on the US calendar today. In thin trading, today’s range will be set based on anticipation of retail sales on Monday and the FOMC on Wednesday,” he said.  

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