(Bloomberg) — US government bond yields climbed to the highest levels in more than a week after a report showing wholesale prices rose more than forecast in February eroded confidence in the outlook for Federal Reserve interest-rate cuts this year.
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The 10-year note’s yield rose as much as 10 basis points to 4.29%, the highest level since March 1. Initially, the market’s response to February producer prices was muted as the inflation data were counteracted by retail sales gauges that were weaker than expected.
Market-implied expectations for Fed policy faded, however, with swap contracts that predict interest-rate changes eventually pricing in slightly less than three quarter-point interest rate cuts by year-end. That was the median forecast of Fed policy makers from December, but those projections will be updated next week, and bond investors have grown concerned that sticky inflation readings will result in a less-dovish outlook. The contracts continue to fully price in an initial quarter-point cut in July.
“There’s a battle here between inflation and the consumer, and right now inflation is winning the battle,” Saira Malik, chief investment officer of Nuveen, said in a Bloomberg Television interview Thursday. “The Fed has been pretty clear, they want to see broad disinflation before they start cutting interest rates. We’re not seeing that yet.”
Weekly jobless claims tallies released at the same time as producer prices and retail sales were lower than economists estimated, consistent with strong labor-market conditions forestalling Fed rate cuts. US yields also face upward pressure from growing expectations that the Bank of Japan will scrap its negative-interest-rate policy at next week’s meeting.
The selloff saddled buyers of this week’s 10-year and 30-year Treasury auctions with losses. Wednesday’s 30-year sale in particular saw strong demand, with investors taking down the offering at a yield of 4.33%. But after the release of producer prices Thursday, the yield on 30-year bonds rose nearly 10 basis points to 4.44%.
There’s “some re-auctioning of this week’s supply,” said Daniel Mulholland, senior managing director at Crews & Associates. “Yesterday’s 30-year especially was taken at the wrong level.”
Earlier, Treasuries briefly pared their drop after a block trade of 25,000 10-year note futures contracts.
Shorter-maturity yields rose less, as the consensus continues to favor rate cuts this year. Two-year yields, for example, rose only as much as six basis points, lessening the inversion of the Treasury yield curve.
“The data released this morning was very conducive to yield-curve steepening,” said Leah Traub, a portfolio manager at Lord Abbett & Co. “We are potentially in a reflation regime but with the Fed biased towards cutting.”
–With assistance from Kristine Aquino and Michael Mackenzie.
(Adds comments, updates yield levels.)
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