US yields on long end rise modestly after producer prices data

NEW YORK – US Treasury yields rose marginally on the long end of the curve Friday after producer prices data came in firmer than expected, which overall did not alter expectations that the Federal Reserve was likely to cut interest rates at its September meeting.

The benchmark 10-year yield rose 1 basis point (bp) to 4.202%. On the week, however, it fell 7.3 bps, on track for its largest weekly fall in about a month.

The US 30-year yield dipped 1.4 bps to 4.418%.

On the short end of the curve, the two-year yield slid 2.6 bps to 4.481%. It hit a more than four-month low of 4.47%, before sliding. On the week, it was down 11.8 bps.

US yields initially climbed after Friday’s data showed the producer price index (PPI) rose 0.2% last month after being unchanged in May. Economists polled by Reuters had forecast the PPI edging up 0.1%.

Details on the components in the producer prices report that go into the calculation of the key inflation measures tracked by the Fed were mostly favorable. That along with the weaker numbers on consumer prices led economists to expect personal consumption expenditures (PCE) inflation rose slightly in June.

“The PPI is a little mixed, but it’s more encouraging than it appears on the surface. There was some knee-jerk selloff reaction at first and maybe some algorithms were programmed to trade based on the miss versus consensus,” said Will Compernolle, macro strategist, at FHN Financial in New York.

“A closer look at the details and it is not as concerning, that’s why yields have backed off. This shouldn’t change anyone’s call for a September rate cut,” he added.

A separate report showed that the University of Michigan’s preliminary reading on the overall index of consumer sentiment fell to 66.0 this month, compared with a final reading of 68.2 in June. Economists polled by Reuters had forecast a preliminary reading of 68.5.

In addition, the survey’s reading of one-year inflation expectations dipped to 2.9% from 3.0% in June. Its five-year inflation outlook also fell to 2.9% from 3.0% in the prior month.

Following the data, the US rate futures market priced in about two rate cuts this year of 25 bps each, which will most likely start in September, with a 94% probability, according to LSEG calculations.

That was higher than the 75% odds seen earlier this week.

The yield curve steepened, or reduced its inversion, with the yield spread between US two-year and 10-year notes narrowing by as much as minus 27.9 basis points (bps) US2US10=TWEB following the PPI report. That’s the tightest spread in more than a week.

The curve has been on a steepening trend since late June. Investors reckoned that the short end of the curve has hit a top since the Fed is unlikely to raise interest rates again. That’s holding the short end relatively steady.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Lucia Mutikani; Editing by Christina Fincher)