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US Treasuries rallied on Thursday after data showed tame producer prices in July, generally coming in line with market forecasts and paring back expectations that the Federal Reserve will raise interest rates at its policy meeting next month.
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A lackluster US 30-year bond auction briefly dented the rally. The bond priced at 5.216 percent, the highest yield since 2001, according to analysts, and slightly above market forecasts, suggesting that investors sought a small premium to take down the bond.
But the overall market bias remained tilted toward lower yields. Falling yields mean bond prices are rising.
In afternoon trading, US 2-year yields, which are sensitive to the outlook for interest rate moves, fell to their lowest since mid-July and were last down 5.7 basis points at 4.142 percent. The benchmark 10-year yield slid 5.3 bps to 4.639 percent, while the US 30-year bond yield was down 3.9 bps at 5.208 percent.
Data showed that the US Producer Price Index was unchanged last month, following a revised 0.1 percent drop in June. Economists polled by Reuters had forecast the PPI rising 0.2 percent.
In the 12 months through July, the PPI increased 4.7 percent after advancing 5.5 percent in June. The forecast was for a 4.9 percent increase year-on-year.
"It's a continuation of the story that we've seen playing out recently, which is: Prices do seem to be coming down incrementally, or inflation is decelerating incrementally," said Bill Merz, head of capital markets research and portfolio construction at US Bank Asset Management in Minneapolis.
"At the same time, the price pressures that do exist haven't been crimping consumer spending, haven't been crimping or limiting earnings growth that we're seeing across the global capital markets."
In other parts of the Treasury market, the yield curve steepened following the PPI data, with the gap between 2-year and 10-year yields hitting 50.6 bps, the widest spread since May 22. It was last at 49.5 bps, compared with 48.9 bps late Wednesday.
The curve showed a bull steepener, in which short-term interest rates are dropping more sharply than longer-dated ones, suggesting that investors are dialing back expectations of Fed tightening.
Consistent with that view, US fed funds futures on Thursday priced in just a 35 percent chance of a rate increase at the September Fed meeting following the PPI report, down from 41 percent late on Wednesday.
Traders also expected 23 bps of tightening by the end of the year after the data, compared with 27 bps on Wednesday.
MIDDLE EAST STILL CRUCIAL TO INFLATION
"Thursday's PPI alone doesn't change the calculus of the Federal Reserve, as the key to taming the inflation picture right now is a resolution in the Middle East or the establishment of pipelines to rely less on the Strait of Hormuz, and the Fed has no influence on that," said Glen Smith, chief investment officer at GDS Wealth Management in Flower Mound, Texas.
"For now, the Fed is likely to keep rates steady through year-end."
Thursday's data also showed US weekly initial jobless claims increased modestly, suggesting that the labor market remains stable despite July's surprise job losses.
Initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 209,000 for the week ended August 8, according to the Labor Department. Economists polled by Reuters had forecast 202,000 claims for the latest week.
The report added to expectations that the Fed will remain on hold at the September meeting.
With the US data out of the way, bond investors focused on the auction of US$25 billion in new 30-year bonds, which showed overall middling results.
The bid-to-cover ratio, a measure of demand, was 2.39 times, marginally down from a six-auction average of 2.43 times.
Indirect bids, which include foreign investors, took 66.8 percent of supply, slightly down from the 67 percent average of the last six auctions.
J.P. Morgan noted in a research note that 30-year yields have risen about 19 bps since the July auction, citing a number of factors including "Fed credibility concerns and rising long-end Japanese government bond yields" pushing the back end of the curve higher.
Reuters
