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(Bloomberg) — Bond prices slumped further Tuesday after the US Treasury’s monthly 10-year note auction drew lackluster demand despite yields rising into the bidding deadline on inflation data that exceeded expectations.
Yields across the maturity spectrum climbed to session highs after the $39 billion auction was awarded at a higher-than-anticipated yield, a sign of poor demand. For 10-year notes, yields that were about 5 basis points higher on the day shortly before 1 p.m. New York time, the bidding deadline, rose as much as 7 basis points.
The consumer price index report for February dented confidence in Federal Reserve interest-rate cuts this year, which Fed policy makers have said are contingent on evident that inflation is moving sustainably toward their 2% target. The core consumer price index, which excludes food and energy, increased 0.4% from January and 3.8% from a year earlier, both roughly 0.1% more than the consensus forecast.
The inflation data “probably makes investors queasy about adding duration,” a measure of bond risk, said Angelo Manolatos, an interest-rates strategist at Wells Fargo Securities.
Traders are still pricing in more than the three quarter-point cuts Fed policy makers in December considered likely, based on the median of their anonymous quarterly forecasts. But their expectation for a first move in June declined slightly, to about 70%. Traders also priced less combined easing this year, about 80 basis points.
Policy makers’ median forecast could change at their next meeting on March 19-20, and the CPI increases — which followed upside surprises in the January data — make it likelier they will.
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Expectations for Fed policy are part of the calculus for investors bidding on Treasury auctions because the Fed’s rate band — which has been 5.25%-5.5% since July — determines returns on cash investments like money-market funds. For traders and fund managers, it determines the cost of financing positions in notes and bonds.
The 10-year auction was awarded at 4.166%, about a basis point higher than the notes’ yield in pre-auction trading. Primary dealers were awarded the biggest share in three months as demand from end users fell.
Manolatos of Wells Fargo said further upward pressure on yields is likely until the 10-year reaches 4.30%, where investors would be inclined to buy.
An auction of three-year notes on Monday fared better, drawing a lower-than-expected yield of 4.256%.
This week’s Treasury supply cycle concludes Wednesday with a $22 billion auction of 30-year bonds.
–With assistance from Kristine Aquino.
(Adds auction result, updates yield levels.)
More stories like this are available on bloomberg.com
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Published: 13 Mar 2024, 06:55 AM IST
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