"The demand for this paper was solid," said Lou Brien, economic strategist at DRW Trading Group in Chicago. But, he added, "It should be noted that the yield is the highest at auction since 2007."
U.S. two-year yields, which are sensitive to the outlook for interest rate moves, fell 3.2 basis points to 4.1872% US2YT=RR. The benchmark 10-year yield slid 1.4 bps to 4.668% US10YT=RR, while U.S. 30-year bond yields were little changed at 5.233% US30YT=RR. Yields fall as prices rise.
CPI data and Fed rate expectations
Data showed that the Consumer Price Index (CPI) edged up 0.1% in July after declining 0.4% in June, which was the first monthly drop in six years. Annual inflation slowed to 3.4% in July from 3.5% in June.
Stripping out the volatile food and energy components, the CPI rose 0.2% last month after being unchanged in June. The so-called core CPI increased 2.5% year-on-year in July, down from 2.6% in June.
Following the data, U.S. rate futures priced in on Wednesday just a 38% chance of a rate increase at the September Fed meeting, down from 48% late on Tuesday. Traders also expected 26 bps of tightening after the CPI report, compared with nearly 30 bps on Tuesday.
"Today's data shows that we could be past peak inflation. It does take some pressure off the Fed. That being said, it's premature to call the all-clear because some of the underlying inflation figures are still elevated," said George Bory, chief investment strategist, fixed income, at Allspring Global Investments.
"We expect no rate hikes this year. But as much as the current stats are showing that inflation could be moderating, much hinges on oil prices and the Middle East."
Oil, geopolitics and auction demand
Iran and the United States remained at odds over efforts to agree a permanent end to the war in the Gulf, according to a senior Iranian source who said there has been no progress in talks to revive the interim deal agreed in June and define a timeframe to implement it.
U.S. crude CLc1 was down 0.4% at $82.87, weighed down somewhat by the tame inflation reading, but it had risen for four straight sessions.
Wednesday's auction was well received, with the bid-to-cover ratio that measures demand hitting 2.53, beating the 2.44 average for refunding auctions, according to BMO Capital Markets.
"Before the auction, Treasuries were retracing the post-CPI gains, although 10-year notes went into the bidding deadline a couple of basis points richer on the day," said Vail Hartman, a rates associate at BMO in New York. "Since the results, there's been a muted response in the follow-through."
Treasuries hold gains after tame inflation data
U.S. Treasuries held gains on Wednesday after data showed a modest increase in consumer prices in July and the government sold 10-year notes at a high yield of 4.683%, the highest in almost 20 years.
Wednesday's inflation report diminished the likelihood of a Federal Reserve interest rate hike next month. The auction was well received but underscored the extent of investor anxiety about inflation and the rates picture, given signs of strength in the U.S. economy.
TLT•
