(Bloomberg) -- The rally in Treasuries took a brief breather Thursday as data showed U.S. consumer prices rose last month more than predicted, but 10-year yields soon slipped back toward their recent lows amid signs that traders are continuing to unwind short positions.
The rate rose as much as 4 basis points to about 1.53% after the release, continuing a reversal that began earlier in the day, before retreating again to around 1.49%. The yield had fallen for the previous two days without any major catalysts, suggesting a potential position shift in the market’s large short base, and on Wednesday it touched a low of 1.47%, a level unseen since May 7. The bid for Treasuries also indicates support for the Federal Reserve’s view that inflation pressures are likely to be “transitory,” although bond-market expectations for consumer-price gains have edged higher on the day.
The latest move comes as the market prepares to digest the final auction of coupon-bearing debt for the week, with $24 billion in 30-year bonds due to be sold later in the day. Traders are also looking ahead to the next Fed policy meeting, which will take place June 15-16. The stronger-than-expected inflation figure gives succor to speculation that the central bank might signal in coming months plans to begin normalizing monetary policy, although it does not appear to have fundamentally altered the market’s view.
“The market will continue to digest the data in an effort to determine the degree to which the move is transitory,” BMO Capital Markets strategist Ian Lyngen said in a note. “This afternoon’s long bond auction continues to loom.”
The data sent 10-year breakeven rates, a bond-market proxy for the annual inflation rate expected over the next decade, higher to about 2.37%. And the yield curve, as measured by the gap between 2- and 10-year rates, steepened to as much as 137 basis points, after earlier in the day dipping to as little as 132 basis points, the least since March.
Wednesday’s sale of $38 billion 10-year notes received robust demand even amid the fall in yields that had preceeded the auction.
The sheer flood of cash coming into short-end markets -- a fact that’s been highlighted by unprecedented usage of the Fed’s reverse repurchase agreement facility -- is also a factor potentially supporting demand for Treasuries, which even at these levels offer more yield than many alternatives.
The reversal of the brief jump in yields also helped weigh on the dollar, which gyrated in the U.S. morning amid moves up in commodity prices and the latest policy announcement from the European Central Bank.
(Updates throughout.)
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