Stronger Inflation Data Lift U.S. Government-Bond Yields
12 July 2019 - 6:22AM
Dow Jones News
By Sam Goldfarb
U.S. government bonds pulled back sharply Thursday, pushing
yields to their highest levels in four weeks, after new data showed
consumer prices rose more than expected in June.
The yield on the benchmark 10-year U.S. Treasury note settled at
2.122%, the highest close since June 12, compared with 2.061%
Wednesday.
Yields, which rise when bond prices fall, climbed after the
Labor Department said the closely watched consumer-price index rose
0.1% in June from the prior month, while core prices rose 0.3%.
Both readings were above the estimates of economists surveyed by
The Wall Street Journal. Yields then took another step higher after
a $16 billion auction of 30-year Treasury bonds attracted soft
demand from investors.
Investors tend to sell Treasurys in response to strong inflation
data because inflation erodes the purchasing power of bonds' fixed
payments.
Investors and analysts were particularly interested in
Thursday's inflation report because it came a day after Federal
Reserve Chairman Jerome Powell strongly signaled that the central
bank is ready to cut interest rates later this month, partly in an
effort to boost inflation.
Federal-funds futures, which investors use to bet on the
direction of interest rates, suggested the chances that the Fed
could cut the federal-funds rate by 0.50 percentage point -- rather
than just 0.25 percentage point -- at its next meeting jumped to
29% after Mr. Powell's comments on Wednesday from 3% a day earlier,
according to CME Group data. The likelihood edged down to 21%
Thursday after the inflation report.
"A good CPI print is not enough to take a cut off the table,"
said Blake Gwinn, a rates strategist at NatWest Markets. Still, the
odds of a 0.50 percentage point cut have declined "as we've gotten
a couple of strong data prints."
The CPI report also pushed the 10-year break-even rate -- a
market-based measure of annual inflation expectations over the next
decade based on the extra yield investors demand to hold regular
10-year Treasurys over 10-year Treasury inflation-protected
securities -- to 1.77% early Thursday, according to Tradeweb. That
was up from 1.75% Wednesday and a recent low of 1.62% on June
17.
Signs that the Fed will attempt to preserve the economic
expansion by cutting interest rates have provided a big boost to
corporate bonds in recent weeks.
The average extra yield, or spread, that investors demand to
hold U.S. investment-grade corporate bonds over Treasurys settled
Wednesday at 1.13 percentage points, according to Bloomberg
Barclays data. That was down from a recent peak of 1.30 percentage
points on June 3 and near the 2019 low of 1.09 percentage points
set in April.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
July 11, 2019 16:07 ET (20:07 GMT)
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