Treasury Yields Retreat from Session Highs

The yield on the US 10-year Treasury note was little changed at 4.52% on Wednesday, easing from an intraday high of 4.55% after the latest US CPI report provided some relief that the energy shock has not yet significantly spilled over into broader price pressures. Annual inflation accelerated to 4.2% in May, in line with market expectations, while core CPI rose by just 0.2% on a monthly basis, undershooting forecasts. Following the release, traders modestly pared back expectations for rate hikes by the Fed this year, although a 25bps increase in December remains fully priced in. Investors will now turn their attention to Thursday's PPI report for further clues on underlying inflationary pressures. Meanwhile, last week's labour market data pointed to a resilient and potentially reaccelerating jobs market, while other economic indicators continue to signal solid momentum in the US economy.

The yield on the US 10-year Treasury note climbed to around 4.54% on Wednesday after facing pressure in the previous session, as renewed hostilities in the Middle East that threatened a fragile ceasefire and the prospects for a lasting peace agreement heightened concerns about inflation and interest rates. The US launched “self-defense strikes” against Iran in response to the downing of an American helicopter, while Iranian Foreign Minister Abbas Araghchi warned that Iran’s armed forces would leave no attack or threat unanswered. Rising energy prices fueled by the regional conflict added to worries about persistent inflation and the possibility of further central bank rate hikes. Investors also awaited the latest US inflation data for additional clues on the Federal Reserve’s policy outlook, after stronger-than-expected jobs figures last week reinforced expectations of an interest rate increase before the end of the year.

The yield on the US 10-year Treasury note fell to 4.54% on Tuesday, retreating from near three-week highs reached in the previous session. The decline was supported by lower oil prices after Israel and Iran agreed to halt attacks, while President Trump signalled that a deal with Tehran could be reached within days. Investors are also focused on Wednesday’s US CPI report for fresh clues on the inflation outlook. Recent economic indicators have continued to point to a resilient US economy and labour market, following last week's stronger-than-expected jobs report. Also, existing home sales increased more than anticipated, while the trade deficit narrowed as exports climbed to a record high. Markets continue to price an increase in borrowing costs by the Fed this year, with the probability of a rate hike as early as October currently estimated at around 51%. Meanwhile, the yield on the more policy-sensitive 2-year Treasury note fell by 2bps to 4.15%.