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Bond Report: Treasury curve flattens as investors weigh impact of April’s CPI data on economic outlook


Yields on 10-year Treasury notes and 30-year bonds racked up their biggest three-day declines since March on Wednesday, as investors continued to fret about the outlook after U.S. inflation data revealed unexpectedly strong, underlying price pressures remain.

The spread between 2- and 10-year rates flattened to 27 basis points on possible signs that bond investors are growing more worried about the path of the economy.

What are yields doing?

The yield on the 10-year Treasury note

declined 7.2 basis points to 2.918% from 2.99% at 3 p.m. Eastern on Tuesday. The yield is down 20.6 basis points over the last three trading days, the largest three-day decline since March 1, according to Dow Jones Market Data. Yields and debt prices move opposite each other.

The yield on the 2-year Treasury note

rose less than 1 basis point to 2.629% from 2.623% Tuesday afternoon.

The 30-year Treasury bond yield

declined 8.7 basis points to 3.040% from 3.127% late Tuesday. The yield is down 18 basis points over the last three trading days, the largest three-day decline since March 1.

What’s driving the market?

Data released Wednesday showed that the annual headline U.S. inflation rate fell to 8.3% in April from 8.5% — the first decline in eight months. It had been expected to come in at 8.1%, the median estimate of forecasts.

Underlying upward pressure on prices showed no signs of easing. Analysts focused, in particular, on the core rate of inflation, which omits food and energy: It rose by 0.6% on a monthly basis, up from 0.3% previously.

Gains in one component of the data, known as “core” services, were enough for Jefferies economists to conclude that 75-basis-point rate hikes are likely to be on the table at the Federal Reserve’s next few meetings.

Read: Here are 4 reasons why market volatility is unlikely to soon subside

Treasury yields have risen sharply in 2022 as investors react to the prospects for inflation and the Federal Reserve’s scramble to rein in price pressures. Last week, the Fed raised its main policy rate target by 50 basis points, or half a percentage point, rather than its usual quarter-point increment. Fed Chairman Jerome Powell has said policy makers are not actively considering a 75 basis point hike.

What do analysts say?

“Today’s CPI print was a surprise to those who thought inflation would move moderately lower,” said Rajeev Sharma, managing director of fixed income at Key Private Bank in New York, referring to the finer details behind the annual headline rate, such as shelter costs.

“Last week, Fed Chairman Jerome Powell signaled that a 75 basis point hike was off the table and the market took that as a relief. But you still haven’t seen underlying inflation moderate. I can understand if the 75 basis point argument comes back. If so, you’d see the 2-year yield start to surge again, to possibly 2.75% over the next few weeks, and a flattening of the curve as the 10-year fails to keep up and stocks sell off,” Sharma said via phone Wednesday.

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