Data showed that the U.S. Producer Price Index was unchanged last month, following a revised 0.1% drop in June. Economists polled by Reuters had forecast the PPI rising 0.2%.
In the 12 months through July, the PPI increased 4.7% after advancing 5.5% in June. The forecast was for a 4.9% increase year-on-year.
"It's a continuation of the story that we've seen playing out recently, which is: prices do seem to be coming down incrementally, or inflation is decelerating incrementally," said Bill Merz, head of capital markets research and portfolio construction at U.S. Bank Asset Management in Minneapolis.
"At the same time, the price pressures that do exist haven't been crimping consumer spending, haven't been crimping or limiting earnings growth that we're seeing across the global capital markets."
In other parts of the Treasury market, the yield curve steepened following the PPI data, with the gap between 2-year and 10-year yields hitting 50.6 bps US2US10=TWEB, the widest spread since May 22. It was last at 49.5 bps, compared with 48.9 bps late Wednesday.
The curve showed a bull steepener, in which short-term interest rates are dropping more sharply than longer-dated ones, suggesting that investors are dialing back expectations of Fed tightening.
Consistent with that view, U.S. fed funds futures priced in on Thursday just a 35% chance of a rate increase at the September Fed meeting following the PPI report, down from 41% late on Wednesday.
Traders also expected 23 bps of tightening by the end of the year after the data, compared with 27 bps on Wednesday.
Thursday's data also showed U.S. initial jobless weekly claims increased modestly, suggesting that the labor market remains stable despite July's surprise job losses.
Initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 209,000 for the week ended August 8, according to the Labor Department. Economists polled by Reuters had forecast 202,000 claims for the latest week.
The report added to expectations that the Fed will remain on hold at the September meeting.
With the U.S. data out of the way, bond investors focused on the auction of $25 billion in new 30-year bonds, which showed overall middling results.
The 30-year bond priced at 5.216%, the highest yield since 2001, according to analysts, and slightly above market forecasts, suggesting that investors sought a small premium to take down the note.
The bid-to-cover ratio, a measure of demand, was 2.39 times, marginally down from a six-auction average of 2.43 times.
Indirect bids, which include foreign investors took 66.8% of supply, slightly down from a 67% average of the last six auctions.
J.P. Morgan pointed out in a research note that 30-year yields have risen about 19 bps since the July auction, citing a number of factors ranging from "Fed credibility concerns and rising long-end Japanese government bond yields" pushing the back end of the curve higher.
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