Treasuries Finish Lackluster Session Modestly Higher

Treasuries turned in a somewhat lackluster performance during trading on Wednesday before ending the day modestly higher.

Bond prices gave back ground after an early move to the upside but managed to finish the session in positive territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, edged down by 1.3 basis points to 2.127 percent.

The modest strength among treasuries came as tame inflation further fueled expectations that the Federal Reserve will cut interest rates in the near future.

The Labor Department said its consumer price index inched up by 0.1 percent in May after rising by 0.3 percent in April. The uptick in prices matched economist estimates.

Excluding food and energy prices, core consumer prices also edged up by 0.1 percent for the fourth consecutive month. Economists had expected core prices to rise by 0.2 percent.

The report also showed a slowdown in the annual rate of consumer price growth, with the headline index up by 1.8 percent year-over-year in May compared to the 2.0 percent increase in April.

The annual rate of core consumer price growth also slowed to 2.0 percent in May from 2.1 percent in the previous month.

“Tariff changes may eventually push up some goods prices, while apparel prices should soon rebound,” said ING Chief International Economist James Knightley. “But for now, inflation pressures in aggregate remain benign.”

He added, “As such, financial markets will see little reason for the Federal Reserve to hold back from rate cuts in coming months to combat the perceived threat of a slowdown caused by intensifying trade tensions.”

Knightley expects the Fed to use next week’s monetary policy meeting to signal an “easing bias,” potentially by repeating Fed Chairman Jerome’s Powell use of the “closely monitoring” phrase and downwardly revising its projections for the economy and interest rates.

“While we doubt that the Fed will carry through with the 100 basis points or so of policy easing currently priced by markets, the longer trade tensions drag on, the greater the chance the Fed will be forced to respond aggressively,” Knightley said.

Meanwhile, traders largely shrugged off the results of the Treasury Department’s auction of $24 billion worth of ten-year notes, which attracted roughly average demand.

The ten-year note auction drew a high yield of 2.130 and a bid-to-cover ratio of 2.49, while the ten previous ten-year note auctions had an average bid-to-cover ratio of 2.46.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

On Thursday, the Treasury Department is due to announce the results of its auction of $16 billion worth of thirty-year bonds.

Trading on Thursday could also be impacted by reaction to reports on weekly jobless claims and import and export prices as well as any developments on the trade front.

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