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Weak import inflation boosts rate cut bets, steepens yield curve

Credit: REUTERS/MARCOS BRINDICCI

U.S. Treasury yields edged lower on Thursday after import prices fell by the most in five months in May, the latest indication of muted inflation pressures, which could strengthen the case for the Federal Reserve to cut interest rates this year.

By Kate Duguid

NEW YORK, June 13 (Reuters) - U.S. Treasury yields edged lower on Thursday after import prices fell by the most in five months in May, the latest indication of muted inflation pressures, which could strengthen the case for the Federal Reserve to cut interest rates this year.

The Labor Department reported that import prices dropped 0.3% last month, the biggest decline since December, after edging up 0.1% in April. In a separate Labor Department report on Thursday, the number of Americans filing applications for unemployment benefits unexpectedly rose, adding to concerns that the labor market has lost steam since job growth cooled in May.

Signs of a slowing labor market and tepid inflation strengthen the case for the Fed to cut interest rates this year. Two-year yields US2YT=RR, which are a proxy for market expectations of rate moves, notched the biggest drop across maturities, and were last down 2.1 basis points to 1.868%.

"The inflation data has been coming in very favorable. Import prices today, CPI yesterday, PPI on Tuesday, so we're definitely not seeing an inflation problem. By the same token, I think a lid will be kept on prices because I don't think people are going to want to be paying up for the 30-year bond at the high end of the trading range," said Mary Ann Hurley, vice president, fixed income trading, D.A. Davidson, referring to the $16 billion of 30-year bonds that the Treasury Department will sell later Thursday.

The spread between the two- and 10-year yields US2US10=TWEB, the most common measure of the yield curve, rose to 24 basis points as the fall in short-dated yields pushed the curve steeper. Still, Thursday's moves were modest as traders held off from taking big positions before Friday's retail sales report.

"We do have retail sales tomorrow and that is definitely more important than any of the data points we got today," said Hurley.

U.S. central bank policymakers are scheduled to meet on June 18-19 against the backdrop of rising trade tensions. Financial markets have priced in at least two rate cuts by the end of 2019. A rate cut is not expected next Wednesday.

The probability of a cut in July rose on Thursday to 67.9%, from 66.3% the day prior, according to CME Group's FedWatch tool.

(Reporting by Kate Duguid)

((kate.duguid@thomsonreuters.com; +646-223-6118; Reuters Messaging: kate.duguid@thomsonreuters.com@thomsonreuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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