Treasurys see past supply test as traders look ahead to consumer inflation data
Treasury yields fell Wednesday as investors took down supply at a closely watched debt auction, suggesting healthy appetite for U.S. government paper at current levels.
The 10-year Treasury note yieldTMUBMUSD10Y, -0.43% fell 1.7 basis points to 2.963%. The 2-year note yieldTMUBMUSD02Y, +0.01% was unchanged at 2.748%, holding near its highest level since July 2008, the 30-year bond yieldTMUBMUSD30Y, -0.42% shed 1.8 basis points to 3.105%. Bond prices move in the opposite direction of yields.
Wholesale inflation for August fell 0.1%, the first time in 18 months, coming in well below the 0.2% increase forecast by economists polled by MarketWatch. Investors are tuned into inflation developments after the wages component of the Labor Department’s August jobs report showed a higher-than-expected jump, suggesting the tight labor market is beginning to stoke inflationary pressures.
The Federal Reserve’s Beige Book highlighted growing worker shortages throughout the country in August.
Muted price increases are bullish for bonds as inflation can erode the value of their fixed-income payments. But analysts say producer prices have little relationship with more widely watched measures of inflation. The muted impact in the bond market from the data suggests investors have their eye on the more important consumer price index reading, forecast to climb 0.3% in August.
“There was little market in response in bonds as yields on both the short end and long end are exactly where they were prior to the [wholesale price data] …This is most likely because the market cares mostly about tomorrow’s CPI release,” wrote Peter Boockvar, chief investment officer of the Bleakley Advisory Group.
Investors bought $23 billion of 10-year notes at auction, the second of three large key sales set for this week. The building price pressures have struggled to dent demand for government paper. In addition, Treasurys have been immune to the ramp up in debt supply after Congress signed off the tax cuts and increases to budget spending caps.
On the Fed front, St. Louis Fed President James Bullard said the central bank should pay heed to market expectations for muted inflation. Meanwhile, Fed Gov. Lael Brainard pushed back against the idea that an inverted yield curve would lead to a recession. This comes as other senior Fed officials have called for the central bank to pause its rate hike path to avoid triggering the bond market signal.
Though the yield curve has yet to invert, the narrowing gap between short-term rates and long-term rates, a gauge of the curve’s steepness, has prompted senior Fed officials to grapple with the market’s perception of inversions as a bad omen.
See: The U.S. yield curve carries a message for international stocks as well as Wall Street
Ahead of the European Central Bank’s meeting on Thursday, a report from Bloomberg News said staff will cut the eurozone’s growth outlook, citing officials familiar with the matter. Softer economic projections could delay the timing for the central bank’s first rate increase since 2011. The 10-year German government bond yieldTMBMKDE-10Y, -4.55% fell 2 basis points to 0.414%.
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