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Bond Report: Treasury yields fall by most since May after June CPI shows inflation easing

Yields on U.S. government debt fell by the most in more than six weeks on Wednesday, after June’s consumer price index showed U.S. inflation slowing again.

What happened

The yield on the 2-year Treasury

plunged 15.4 basis points to 4.740% from 4.894% on Tuesday, the largest one-day decline since May 4, based on 3 p.m. figures from Dow Jones Market Data. Wednesday’s level is the lowest since June 28.

The yield on the 10-year Treasury

retreated 12 basis points to 3.860% from 3.980% as of Tuesday afternoon.

The yield on the 30-year Treasury

fell 6.9 basis points to 3.950% from 4.019% late Tuesday.

Wednesday’s levels are respectively the lowest for the 10- and 30-year rates since July 3 and July 5. The 10- and 30-year rates each fell by the most since May 30.

What drove markets

Data released on Wednesday showed that U.S. consumer prices rose a modest 0.2% in June and the rate of inflation slowed to 3%, or the lowest level since early 2021, from 4% in the prior month.

The so-called core rate of inflation that omits food and energy also rose a mild 0.2% last month, less than Wall Street’s forecast for a 0.3% gain. The increase in the core rate over the past 12 months fell to 4.8% from 5.3%.

The policy-sensitive 2-year yield fell at a faster pace than the 10-year yield, producing a less negative spread.

Meanwhile, the Fed’s Beige Book report released on Wednesday showed that economic activity increased only slightly in late May to June.

Markets priced in a 94.9% probability that the Fed will raise its main interest-target rate by 25 basis points to a range of 5.25% -5.5% on July 26, according to the CME FedWatch Tool. Traders also pulled back on the likelihood of another similar-size hike by year-end. The central bank is expected to take its fed-funds rate target back down to around 5% or lower next year, according to 30-day Fed Funds futures.

What analysts are saying

“There is nothing not to like in the [CPI] report,” said Ronald Temple, chief market strategist at Lazard. “Better-than-expected data increases the likelihood that a Fed rate increase on July 26 will be the last of this cycle.”

“It’s too early to pop the Champagne, but it’s not too early to start chilling the bottle,” Temple wrote in an email.

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