#Bond Report: Treasury yields slip ahead of U.S. consumer price data for June

How Treasurys are performing

• The 10-year Treasury note
  TMUBMUSD10Y,
  1.346%
  yields 1.352%, compared with 1.362% at 3 p.m. Eastern Time on Monday. Yields for debt fall as prices rise.

• The 30-year Treasury bond rate
  TMUBMUSD30Y,
  1.975%
  was at 1.983%, versus 1.993% a day ago.

• The 2-year Treasury note
  TMUBMUSD02Y,
  0.232%
  was yielding 0.229%, compared with 0.231%.

Fixed-income drivers

Treasury debt yields have drifted lower this week, implying healthy appetite for government debt, despite apparent concerns about inflation.

The U.S. June consumer-price index is seen increasing 5% in June from a year ago, matching May’s increase and continuing the highest 12-month rate since 2008. The core CPI, which excludes volatile food and energy prices, are projected to rise 4% from a year before, economists surveyed by Dow Jones forecast.

However, comments from New York Federal Reserve President John Williams on Monday implied that the central bank might be reluctant to remove financial market accommodation known as QE or quantitative easing soon.

Williams said conditions in the labor market haven’t yet been sufficient to pare back the pace of the Fed’s QE stimulus program, which entails monthly purchases of $80 billion in Treasurys and $40 billion in mortgage-backed securities.

However, the president of the St. Louis Fed Jame Bullard said Tuesday the Federal Reserve should start reducing the stimulus it provides to the U.S. economy, though he added the reduction didn’t need to start immediately. “I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures,” he told the The Wall Street Journal in an interview published Tuesday.

Meanwhile, investors will watch at 1 p.m. ET how an auction of $24 billion of 30-year U.S. Treasuries fares.

What strategists and traders say

“For the time being, investors are faced with yet another strong inflation report and 10-year yields at 1.35% despite the Fed’s ongoing progress toward scaling back bond purchases,” wrote BMO Capital Markets analysts Ian Lyngen and Ben Jeffery in a research note.

“It’s this backdrop that has us wary of a more durable rethink of where US rates can (or have) peaked at this point in the cycle; which could trigger an even greater capitulation. If nothing else, the fact that the move to a lower yield range that saw 10-year yields dip below 1.25% wasn’t met by a wholesale rejection of the bid implies a degree of sustainability if nothing else,” the analysts wrote.

“Positions in the Treasury market remain short; albeit not as short as seen earlier in the year,” Lyngen and Jeffery write.