Treasuries Show Notable Move To The Downside Amid Inflation Worries

Reflecting concerns about rising inflation, treasuries showed a significant move to the downside during trading on Wednesday.

Bond prices moved notably lower in morning trading and remained firmly negative throughout the afternoon. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, advanced 7.1 basis points to 1.695 percent.

The ten-year yield closed higher for the fourth consecutive session, reaching its highest closing level in over a month.

The weakness among treasuries reflected concerns about the accelerating pace of inflation following the release of the Labor Department’s report on consumer prices in the month of April.

The Labor Department said its consumer price index climbed by 0.8 percent in April after rising by 0.6 percent in March. Economists had expected consumer prices to inch up by 0.2 percent.

Excluding food and energy prices, core consumer prices also advanced by 0.9 percent in April following a 0.3 percent uptick in March. Core prices were expected to rise by another 0.3 percent.

The much bigger than expected jump in core consumer prices reflected the largest increase since April of 1982.

With the much bigger than expected monthly increase, consumer prices in April were up by 4.2 percent compared to the same month a year ago, reflecting the biggest jump since September of 2008.

Core consumer prices also surged up by 3.0 percent year-over-year, marking the biggest annual increase since January of 1996.

The significantly faster price growth raised concerns about the outlook for monetary policy even though the Federal Reserve has repeatedly downplayed the risks of inflation.

The Fed has indicated that it won’t begin tightening monetary policy until inflation is moderately above its 2 percent target for “some time.”

Michael Pearce, Senior U.S. Economist at Capital Economics, described the numbers as “scary” but said muted gains in the cyclical components of the consumer price index lend weight to the Federal Reserve’s argument that the surge in inflation in April will be “largely transitory.”

“With employment still more than 8 million short of its pre-pandemic level, we expect the Fed to maintain its dovish line, even if, as we expect, inflation gains broaden out over the coming months,” Pearce said.

Treasuries remained firmly negative after the Treasury Department revealed this month’s auction of $41 billion worth of ten-year notes attracted slightly above average demand.

The ten-year note auction drew a high yield of 1.684 percent and a bid-to-cover ratio of 2.45, while the ten previous ten-year note auctions had an average bid-to-cover ratio of 240.

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 is scheduled to announce the results of this month’s auction of $27 billion worth of thirty-year bonds.

Trading on Thursday may also be impacted by reaction to the latest economic data, including reports on weekly jobless claims and producer price inflation.

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