Bond Report: Short-term Treasury Yields Retreat Sharply After Soft Inflation Data

U.S. Treasury yields fell on Wednesday after the release of anemic inflation data put pressure on the Federal Reserve to ease monetary policy this year, with market participants fearful of a recession.

What are Treasurys doing?

The 2-year Treasury note yield TMUBMUSD02Y, -0.02% attuned to shifting expectations for Fed policy, slipped 3.1 basis points to 1.891%. The 10-year note yield TMUBMUSD10Y, -0.13% fell a single basis points to 2.129%, while the 30-year bond yield TMUBMUSD30Y, -0.08% was virtually unchanged at 2.623%. Bond prices move in the opposite direction of yields.

See: Here’s why this overlooked yield-curve measure points to a ‘soft landing’ by the Fed

What’s driving Treasurys?

Consumer price inflation for May edged up by 0.1%, in line with analysts’ expectations. More important, the core gauge which strips out for food and energy prices rose 0.1%, less than the 0.2% increase expected. Market participants said the lack of inflation pressures could give another reason for the Federal Reserve to ease policy as economists urge it to cut rates this year amid global trade tensions.

Read: U.S. inflation expectations decline to lowest level since late 2017

Traders in the fed-funds futures market foresee an 80% chance of a cut at next month’s meeting by the Federal Open Market Committee, the central bank’s rate-setting body.

Investors took down $24 billion of 10-year notes without much indigestion. Even as yields stay near multiyear lows, jittery market participants have demonstrated a strong demand for haven assets like government paper.

What did market participants say?

“With the June FOMC meeting just one week away, low readings of inflation offer another reason for the committee to favor increased accommodation. While a change in the fed-funds rate is unlikely, investors can expect a softer tone from the Fed, opening the door for a rate reduction in the coming months,” wrote Lindsey Piegza, chief economist for Stifel.

Opinion: Bond guru who called interest rate top in 2018 now says yields could fall further

What else is on investors’ radar?

Protests in Hong Kong have drawn the eye of some investors. Police on Wednesday fired tear gas at demonstrators who had massed outside of Hong Kong’s legislative chamber in opposition to a proposed extradition bill that has added to business uncertainty around the semiautonomous city.

The Hang Seng Index HSI, -0.05% slipped 1.7% on Wednesday. Hong Kong’s one-month borrowing rate that banks use to loan funds to each other rose to 2.43%, around its highest level since Oct. 2008.

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