Treasury Yields Waver

The yield on the 10-Year US Treasury note swung upward to the 4.7% mark on Friday, not far from the 19-month high of 4.75% tested earlier in the week on renewed aversion to bonds on the long end of the curve. Year-ahead inflation expectations compiled by the University of Michigan rose in August, a fifth month above the 4% level. This was aligned with lingering concerns that the Federal Reserve may be complacent to inflationary risks in the US economy, recently exacerbated by the surge in energy prices due to the war in the Middle East. Signals from Fed Chair Warsh that a rate hike may not be his preferred instrument against inflation drove long-dated yields to surge, with the 30-year bond rising to a 19-year high. Treasuries were also pressured by concerns that Japan could sell some of their ample reserves should the Ministry of Finance defend against a weak yen again. Treasuries undercame selling pressure despite softer-than-expected producer prices and weak retail sales data.

The yield on the 10-year US Treasury note was at 4.65% on Friday, dropping after testing 19-month highs of 4.75% on Tuesday as recent economic data limited the urgency for the Federal Reserve to raise interest rates. Producer prices were firmly under expectations in July and consumer inflation slowed for a second consecutive month, suggesting that the rebound in energy prices had limited impact on higher price growth. In turn, retail sales unexpectedly contracted in the period, driving part of the market to consider momentary weakness for consumers. Still, the drop in yields were more muted in the longer end of the curve as lingering risks on energy supply maintained inflationary risks in the near term. This was magnified by the trend of a weakening Japanese yen, risking selling pressure from the largest foreign holder of US Treasury notes should the country intervene in the foreign exchange market. Such concerns were reflected by a sharp tail in the latest 30-year bote auction.

The 10-year US Treasury yield hovered around 4.65% on Friday, holding a recent decline as softer-than-expected inflation data led investors to reduce expectations for a Federal Reserve rate hike in September. Figures released Thursday showed US producer prices were flat in July, reinforcing Wednesday’s subdued CPI report and suggesting that inflationary pressures remain contained. As a result, the Fed faces less urgency to tighten monetary policy in the near term, with markets now assigning around a 35% probability to a 25 basis point rate increase in September, compared with 55% a week earlier. The data also indicated that the initial inflationary effects of the Middle East conflict and higher energy prices could be losing momentum. Still, uncertainty surrounding efforts to end the conflict and reopen the Strait of Hormuz remains a key risk to the inflation outlook.