Hunger for Treasuries Drags Yields to 3-Month Low Despite CPI


Yields on the benchmark 10-year Treasury note fell to their lowest level in three months amid signs that traders are continuing to unwind short positions, defying a faster-than-expected increase in U.S. consumer prices.

The yield fell as much as 6 basis points and ended Thursday at its session low of 1.43%, below its nadir from May 7. The move, which took it to a level last seen March 3, came after inflation data earlier pushed the rate up by as much as 4 basis points to 1.53%. The yield has now fallen for several days without a clear major catalyst to move lower, suggesting a potential position shift is afoot in the market’s large short base. The bid for Treasuries also indicates support for the Federal Reserve’s view that inflation pressures are likely to be “transitory,” although bond-market expectations for consumer-price gains have edged higher on the day.

Treasury yields keep dropping even after CPI beats estimates

The latest move came even as the market struggled to digest the final auction of coupon-bearing debt for the week, with a $24 billion reopening sale of 30-year bonds coming in at a slightly higher yield than the market indicated at the bidding deadline. Traders are also looking ahead to the next Fed policy meeting, which will take place June 15-16. Yet while the stronger-than-expected inflation figure gives succor to speculation that the central bank might signal in coming months plans to begin normalizing monetary policy, it does not appear to have fundamentally altered the market’s view.

“The market has seen short covering and reflation unwind trades,” Andy Brenner, head of international fixed income at National Alliance, said in a note.

The data sent 10-year breakeven rates, a bond-market proxy for the annual inflation rate expected over the next decade, higher to about 2.36%.

The sheer flood of cash coming into short-end markets -- a fact that’s been highlighted by unprecedented usage of the Fed’s reverse repurchase agreement facility -- is also a factor potentially supporting demand for Treasuries, which even at these levels offer more yield than many alternatives.

The reversal of the brief jump in yields also helped weigh on the dollar, which gyrated in the U.S. morning amid moves up in commodity prices and the latest policy announcement from the European Central Bank.

— With assistance by Edward Bolingbroke

( Updates pricing.)