Yields rise after inflation moderates, soft 30-yr auction

NEW YORK, Aug 10 – US Treasury yields rose on Thursday after data showed that inflation rose only modestly in July, in line with economists’ expectations, and as the US Treasury Department saw soft demand for a sale of 30-year bonds.

Higher rents were mostly offset by declining costs of goods such as motor vehicles and furniture. Headline and core consumer prices both rose by 0.2% in July, for an annual gain of 3.2% and 4.7%, respectively.

“The July CPI report was good – that said it’s been a few months since individual CPI reports have had a material and lasting impact on market conditions,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

“The crisis period of inflation is over and really has been for a few months,” LeBas added. “Assuming that the August print is somewhere in this vicinity. … I think this largely terminates the rate hike cycle.”

Traders have cut bets that the Fed will continue raising interest rates as inflation falls back closer to the US central bank’s 2% annual target.

Fed funds futures traders are pricing in further tightening of only around 8 basis points, indicating low expectations of an additional 25 basis points hike.

Yields fell heading into the inflation release, which analysts attributed to some traders betting that price pressures may have slowed more than consensus forecasts indicated.

They then returned to levels that were close to the highs reached on Wednesday, and added to gains after the US Treasury saw soft demand for a USD 23 billion sale of 30-year debt. It was the final sale of USD 103 billion in coupon-bearing supply this week.

The bonds sold at a high yield of 4.189%, more than a basis point above where they had traded before the auction. Demand was 2.42 times the amount of bonds on offer, the lowest since April.

The Treasury saw solid demand for a USD 42 billion sale of three-year notes on Tuesday, and a USD 38 billion auction of 10-year notes on Wednesday.

Benchmark 10-year yields gained 8 basis points on the day to 4.082%. They reached 4.206% on Friday, their highest since Nov. 8.

Two-year yields rose 2 basis points to 4.821%. The yields have fallen from 5.120% on July 6, which was the highest since June 2007.

The closely watched inversion in the two-year, 10-year Treasury yield curve narrowed to minus 74 basis points.

August 10 Thursday 3:00 PM New York / 1900 GMT

(Reporting by Karen Brettell; Additional reporting by Medha Singh; Editing by Susan Fenton and Jonathan Oatis)