US 10-Year Yield Holds Decline

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.

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.