US Treasuries hold gains as softer inflation weakens rate-hike fears

US Treasuries retained their gains on Wednesday following the release of inflation data that showed that consumer prices rose moderately in July. The government’s 10-year note auction cleared at a yield of 4.683%, the highest in nearly two decades, Reuters reported. The inflation reading weakened the case for a Federal Reserve rate hike next month.

Although the auction attracted healthy demand, the elevated yield reflected lingering investor concerns about inflation and interest rates amid continued strength in the US economy.

“The demand for this paper was solid,” Lou Brien, economic strategist at DRW Trading Group in Chicago, told Reuters. However, he noted that the auction yield was the highest since 2007.


The two-year Treasury yield, which is sensitive to interest-rate expectations, fell 3.2 basis points to 4.1872%. The benchmark 10-year yield declined 1.4 basis points to 4.668%, while the 30-year yield was little changed at 5.233%. Bond yields move inversely to prices.

The Consumer Price Index rose 0.1% in July after falling 0.4% in June, its first monthly decline in six years. Annual inflation eased to 3.4% from 3.5%.

Excluding volatile food and energy prices, the CPI rose 0.2% in July after remaining unchanged in June. Annual core inflation eased to 2.5% from 2.6%.

After the inflation figures were released, US rate futures priced in a 38% chance of a September rate hike, down from 48% late on Tuesday. Traders also expected 26 basis points of tightening, compared with nearly 30 basis points before the report.

“Today’s data shows that we could be past peak inflation. It does take some pressure off the Fed. That being said, it’s premature to call the all-clear because some of the underlying inflation figures are still elevated,” George Bory, chief investment strategist for fixed income at Allspring Global Investments, told Reuters.

“We expect no rate hikes this year. But as much as the current stats are showing that inflation could be moderating, much hinges on oil prices and the Middle East,” Bory added.

Iran and the United States remained divided over efforts to secure a permanent end to the Gulf war. A senior Iranian source said talks had made no progress toward reviving the interim agreement reached in June or setting a timeline for its implementation.

US crude fell 0.4% to $82.87, partly pressured by the subdued inflation data, after rising for four consecutive sessions.

Wednesday’s Treasury auction drew strong demand, with the bid-to-cover ratio reaching 2.53, above the 2.44 average for refunding auctions, according to BMO Capital Markets.

“Before the auction, Treasuries were retracing the post-CPI gains, although 10-year notes went into the bidding deadline a couple of basis points richer on the day,” said Vail Hartman, a rates associate at BMO in New York.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)