U.S. Treasury yields fell on Wednesday, with the benchmark 10-year Treasury note on track for its first consecutive daily declines in nearly three weeks, after economic data showed an easing of price pressures for a second straight day.
The Labor Department said the Producer Price Index for final demand dropped 0.3% last month, below the estimate of economists polled by Reuters that called for an unchanged reading, after a downwardly revised 0.6% increase in May.
In the 12 months through June, the PPI increased 5.5% after rising 6.0% in May.
The softer-than-expected data followed the release on Tuesday of the Consumer Price Index report, which showed inflation moderated in June.
Fed officials say more evidence is needed
Top Fed officials, including Warsh, on Tuesday welcomed the cooler CPI data, but said they would need more such readings to feel confident that price pressures are truly easing.
Warsh is testifying before the Senate Banking Committee on Wednesday.
On Wednesday, New York Fed President John Williams said that while inflation is "unquestionably too high," there are reasons to believe it may have crested and should soon start subsiding, with monetary policy well positioned to guide inflation back to the central bank's 2% target.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes was at a positive 40.3 basis points.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities was last at 2.257% after closing at 2.284% on July 14. The 10-year TIPS breakeven rate was last at 2.247%, indicating the market sees inflation averaging about 2.2% a year for the next decade.
Rate-hike odds ease as inflation expectations cool
The recent inflation readings have led to a drop in expectations that the Federal Reserve would raise interest rates at its policy meeting later this month, with markets now pricing in a 12.3% chance for a hike of at least 25 basis points, down from more than 40% on Monday, according to CME Group's FedWatch tool. Expectations for a hike at the September meeting, however, are still roughly 50%.
The yield on the benchmark U.S. 10-year Treasury note fell 2 basis points to 4.565% and was on pace for its first back-to-back daily decline since June 26.
The yield on the 30-year bond shed 0.2 basis points to 5.092%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 3.3 basis points to 4.16%.
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