US 10-Year Yield Holds Pullback

The yield on the 10-year US Treasury note eased to 4.66% on Thursday, pulling back further since testing 19-month highs of 4.75% two sessions prior after the release of soft producer price data. Producer prices were unchanged from the previous month in July, below expectations of a 0.2% increase, and aligning the tame signals from consumer inflation data the previous session. The data consolidated the view that current inflation levels do not warrant a rate hike by the Federal Reserve next month. 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 tail in the latest 10-year note auction.

The yield on the 10-year US Treasury note eased to around 4.68% on Thursday as investors looked ahead to July’s producer inflation report for further clues on recent price trends. Data released Wednesday showed US consumer inflation slowed for a second consecutive month to 3.4% in July, while rising just 0.1% from the previous month. Markets now see around a 40% chance of a 25 basis point rate hike from the Federal Reserve in September, down from nearly 50% a day earlier. Meanwhile, the government sold 10-year notes at a yield of 4.683%, the most since the global financial crisis. Inflation above the Federal Reserve’s target and widening budget deficits have contributed to elevated long-term yields, with investors demanding greater compensation to finance the US government.

The yield on the 10-year US Treasury note was at 4.65%, extending the pullback from last session after the US inflation rate refrained from surpassing expectations. Both headline and core inflation rates eased as expected in July, removing some of the pressure on FOMC to raise interest rates next month. Gauges of underlying consumer prices had risen sharply this year after the outbreak of war in Iran lifted energy costs and halted key supply chains. This prompted multiple FOMC members to deliver hawkish dissents in the Fed's last rate hold, with more policymakers signaling hawkish reaction functions in speeches since. Still, elevated energy prices were still being transmitted to price indices as President Trump hardened his stance on Iran, prompting Tehran to dismiss an imminent suspension on blockades that prevent trade. Concerns that the Fed will not raise rates to combat inflation had already drive long-yields to surge earlier in the month.