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Treasury yields fall further after cooling inflation data

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Bond yields continued to decline Thursday as traders adjusted positions following news U.S. inflation is at its lowest in more than two years.

What’s happening

  • The yield on the 2-year Treasury
    TMUBMUSD02Y,
    4.653%

    slipped 8.8 basis points to 4.662%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    TMUBMUSD10Y,
    3.824%

    retreated 3.9 basis points to 3.823%.

  • The yield on the 30-year Treasury
    TMUBMUSD30Y,
    3.940%

    fell 1.2 basis points to 3.939%.

What’s driving markets

Investors continue to move into bonds, pushing Treasury yields lower, amid hopes cooling inflation will allow the Federal Reserve’s monetary policy tightening to be less aggressive than feared.

Data released Wednesday showed headline annual inflation of 3% in June, well below the 9.1% of a year ago. The 2-year Treasury yield, which was trading just above 5% a week ago, was 4.662% early Thursday.

Markets are still pricing in a 90% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25% to 5.50% after its meeting on July 26, according to the CME FedWatch tool.

But the chances of another 25 basis point hike in September are just 11%, down from about 28% a week ago.

The central bank is not expected to take its Fed funds rate target back down to around 5% until April 2024, according to 30-day Fed Funds futures. A week or so ago the market reckoned it would be June 2024 before rates fell to that level.

U.S. economic updates set for release on Thursday include the weekly initial jobless claims and June producer prices data, both at 8:30 a.m. Eastern. And there is more Fedspeak, with San Francisco Fed President Daly giving a TV interview at 11:10 a.m., and Fed Governor Waller speaking at 6:45 p.m.

The U.S. Treasury will sell $18 billion of 30-year bonds at 1 p.m.

What are analysts saying

“The CPI did not manage to chip out anything from the pricing for the Fed meeting in two weeks as the futures market still indicate high confidence in a hike, but instead next year’s forwards rallied the most,” wrote Jan Nevruzi, U.S. rates strategist at NatWest Markets.

“That is understandable as the Fed’s institutional decision-making structure can be rather dogmatic rather than practical and they already indicated a desire to raise rates in July. I do not think the data warrants a hike, but can also see why the Fed would want to see another soft inflation number before calling it quits,” he added.

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