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Yields little changed by jump in U.S. consumer prices

Credit: REUTERS/MARCOS BRINDICCI

The Treasury market on Thursday brushed off the biggest gain in U.S. underlying consumer prices in 1-1/2 years, as it did little to change expectations the Federal Reserve will cut interest rates later this month.

By Kate Duguid

NEW YORK, July 11 (Reuters) - The Treasury market on Thursday brushed off the biggest gain in U.S. underlying consumer prices in 1-1/2 years, as it did little to change expectations the Federal Reserve will cut interest rates later this month.

The Labor Department reported its consumer price index - excluding the volatile food and energy components - rose 0.3% in June. That is the largest increase since January 2018 and followed four straight monthly gains of 0.1%. The so-called core CPI was boosted by strong increases in the prices for apparel, used cars and trucks, as well as household furnishings.

Inflation has consistently undershot the Fed's 2% target and has been cited as a risk by the central bank as it weighs cutting interest rates in July for the first time since 2015.

"The Fed has left itself two paths to a rate cut. One is inflation-shortfall-based and that is fading with this morning's CPI data. The other is insurance-based," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

On Wednesday, Fed Chair Jerome Powell delivered testimony to Congress and the bank published minutes from its rate-setting committee's June meeting, both of which cite the risks of slowing global growth and the U.S. trade war with China. "It seems policymakers are more focused on an insurance rate cut - insurance against future growth shortfall."

That explains the market's lack of a reaction to the inflation data. The two-year yield US2YT=RR, a proxy for market expectations of changes in rate policy, rose initially, but retraced most of those gains, last up less than a basis points at 1.836%. The benchmark 10-year US10YT=RR made less of an initial move, but retained the gains, with its yield last up 1.6 basis points at 2.077%.

The chance of a 50-basis point cut fell on Thursday to 24.5% from 29.2% on Wednesday, according to CME Group's FedWatch tool. A 25-point cut has been fully priced in by the market, however, and was not altered by the inflation report.

"You have to guess Jay Powell had this data point on his desk yesterday," said LeBas.

Later Thursday, the Treasury Department will auction $16 billion of 30-year notes US30YT=RR. Demand is expected to be strong: "The 30-year has been soft for the last couple days ... so I think we're setting up for pretty good demand at auction," said LeBas.

July 11 Thursday 10:10AM New York / 1410 GMT

Price

US T BONDS SEP/d USc1

154-4/32

-17/32

10YR TNotes SE/d TYc1

127-60/256

-7/32

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

2.1225

2.1635

-0.026

Six-month bills US6MT=RR

2.025

2.0799

0.008

Two-year note US2YT=RR

99-152/256

1.836

0.010

Three-year note US3YT=RR

99-214/256

1.8064

0.008

Five-year note US5YT=RR

99-146/256

1.8409

0.012

Seven-year note US7YT=RR

99-140/256

1.9448

0.012

10-year note US10YT=RR

102-168/256

2.0751

0.014

30-year bond US30YT=RR

105-228/256

2.5903

0.019

YIELD CURVE

Last (bps)

Net Change (bps)

10-year vs 2-year yield

23.60

0.55

30-year vs 5-year yield

74.90

0.10

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

3.75

-0.25

U.S. 3-year dollar swap spread

1.50

0.50

U.S. 5-year dollar swap spread

-1.00

0.50

U.S. 10-year dollar swap spread

-5.50

0.00

U.S. 30-year dollar swap spread

-32.75

-0.50

(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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