Yields fall as producer price increases ease

NEW YORK, May 11 (Reuters) – US Treasury yields fell on Thursday after data showed that producer price increases eased in April, adding to expectations that an improving inflation picture will lead the Federal Reserve to pause its interest rate increases.

Producer prices rose at an annual rate of 2.3% last month, the smallest year-on-year rise since January 2021 and down from a 2.7% advance in March.

It comes after data on Wednesday showed consumer price gains slowing to below 5% in April for the first time in two years.

“The inflation picture is getting much better,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York, adding that “the Fed is probably done tightening.”

Benchmark 10-year notes were last at 3.357%, down 8 basis points on the day, while two-year yields fell 8 basis points to 3.820%. The inversion in the yield curve between two-year and 10-year yields is at minus 46 basis points.

Investors are concerned that the economy will slow and possibly tip into recession in the second half of the year as a result of higher interest rates and on tightening credit conditions, which have worsened as a result of stress on the US regional bank sector.

The Fed is viewed as almost certain to keep rates unchanged at its next meeting in June. Fed funds futures traders are also pricing in around 84 basis points of rate cuts for the second half of the year, with a rate cut fully priced in for September.

Other data on Thursday showed that the number of Americans filing new claims for jobless benefits jumped last week to the highest level since late 2021, suggesting that higher interest rates were starting to weigh on the labor market.

The Treasury will sell USD 21 billion in 30-year bonds on Thursday, the final sale of USD 96 billion in coupon-bearing supply this week. The government saw strong demand for a USD 40 billion sale of three-year notes on Tuesday and solid interest in a USD 35 billion auction of 10-year notes on Wednesday.

May 11 Thursday 9:38 AM New York / 1338 GMT

(Reporting by Karen Brettell; Editing by Sharon Singleton)